Taxes on Buildings and Land in a Dynamic Model of Real Estate Markets

Henry George’s single tax on land is an elusive concept to implement, because land is occupied by a variety of buildings or is undeveloped. Land value is undefined since the value of the land lying under buildings is difficult to estimate and does not correspond to real market value. Therefore, it is hard to find taxes that are accurately related to land value and, hence, to the ability to pay and still satisfy George’s axiom. Static models unrealistically pretend that all the land is available in the market at all points in time. To properly treat dynamics, a generalized perfect-foresight model of real estate markets solvable by simulation is presented. Using a version of this model stripped-down to its bare essentials, the effects of the conventional ad-valorem property tax and of an ad-valorem tax on undeveloped land are analyzed. We show a new result that the conventional tax speeds up the demolition-reconstruction cycle, shortening the life span of buildings and thus resulting in excessive use of structural capital over time, while a tax on undeveloped land has the opposite effects. We then turn to the application of the dynamic simulation model to the optimal taxation problem adapted to real estate markets. In this problem a different tax rate is levied on each type of undeveloped land and each type of building to meet a desired revenue goal, recognizing the different price elasticities of demand and supply for these assets. The formulation is designed to calculate deadweight losses associated with such optimal taxation schemes.

Vanishing Cities: What Does the New Economic Geography Imply About the Efficiency of Urbanization?

How should the size and number of cities evolve optimally as population grows? Stripped of the constraints of geography itself, the setup of the New Economic Geography implies that de-agglomeration (or de- urbanization) is efficient. The number of cities increases while the size of each decreases on the optimal path until the economy suddenly disperses to tiny towns of stand-alone firms each specializing in a unique good. The cause of this narrow result is the NEG’s strong emphasis on intercity trade to satisfy the taste for more goods. For the same aggregate population, a system of smaller cities saves time lost in commuting, has a larger labor supply and makes more goods than does a system of larger cities. Falling interurban trading costs favor this de- urbanization process. Only if intraurban commuting costs fall sufficiently, can a pattern of growing city sizes be efficient with growing population. Of course, when the number of cities or the geographic space itself is limited or asymmetric, then agglomeration can arise as an artifact of the constraints imposed by geography as demonstrated by numerous NEG models. This reveals that the central agglomerative force in the NEG is space itself and not the underlying economic relations.

Ethnic Segregation and Ghettos

Throughout history cities have contained separate areas where ethnic groups are concentrated. In the U.S. many older cities in the Northeast and Midwest contain large African-American ghettos. We discuss the causes and consequences of ethnic and racial segregation. We identify differences between voluntary and involuntary ghettos and we understand them using agglomeration economies, positive and negative externalities, bid rent theory, land and labor markets. We show that sharply segregated urban land use patterns can be socially efficient or inefficient depending on the nature of preferences and the externalities. Exclusionary policies often capture the economic efficiency. We observe a bewildering variety of political and public policy responses to segregation in Brazil, Cyprus, Europe, India, Israel, South Africa and the United States.

Intercity Trade and the Industrial Diversification of Cities

The industrial diversification of cities is explained without imposing linkages among industries. In each of two city-industries, a manufacture is produced competitively as the final good using labor and industry- specific differentiated services. Manufacturers import the services of their industry from all cities that produce them, since their technology favors variety. In specialized cities, the city-industry is large and many services are locally available but the two manufactures have to be traded among cities. In diversified cities the two manufactures are produced in the same city, and each industry crowds out half the local services of the other, but manufactures need not be imported. A lower cost of trading manufactures (e.g. railroads and intercity highways) favors a system of specialized cities, while a lower cost of trading services (e.g. telephone, the Internet) favors a system of diversified cities since the latter cities rely more on imported services, having fewer locally. A larger cost-share of services favors specialization, and high intracity commuting cost and population growth favor diversification.Trade, diversification, specialization, city systems

Moving costs, security of tenure and eviction

We contrast equilibrium and welfare analysis in the rental housing market under two property rights regimes – eviction rights and security of tenure – when tenants face moving costs. A tenant’s idiosyncratic benefit from his unit and a landlord’s idiosyncratic profit from conversion are treated as private information. The two regimes differ when a tenant wants to stay in his unit but the landlord wants to redevelop it. North American housing markets have been characterized by eviction rights and many European housing markets by security of tenure. Under eviction rights, a landlord who evicts a tenant imposes a negative externality on him, which can be imperfectly internalized through a demolition (conversion) tax. Similarly, under security of tenure efficiency can be improved by subsidizing the moving costs of tenants.Moving costs, eviction, tenure security, rental housing markets

Impacts of policy instruments to reduce congestion and emissions from urban transportation : the case of Sao Paulo, Brazil

This study examines impacts on net social benefits or economic welfare of alternative policy instruments for reducing traffic congestion and atmospheric emissions in São Paulo, Brazil. The study shows that expanding road networks, subsidizing public transit, and improving automobile fuel economy may not be as effective as suggested by economic theories because these policies could cause significant rebound effects. Although pricing instruments such as congestion tolls and fuel taxes would certainly reduce congestion and emissions, the optimal level of these instruments would steeply increase the monetary cost of travel per trip and are therefore politically difficult to implement. However, a noticeable finding is that even smaller tolls, which are more likely to be politically acceptable, have substantial benefits in terms of reducing congestion and emissions. Among the various policy instruments examined in the study, the most socially preferable policy option for São Paulo would be to introduce a mix of congestion toll and fuel taxes on automobiles and use the revenues to improve public transit systems.Transport Economics Policy&Planning,Climate Change Economics,Roads&Highways,Climate Change Mitigation and Green House Gases,Transport and Environment

Manufacturers'responses to infrastructure deficiencies in Nigeria : private alternatives and policy options

As cities in developing countries grow, the need to meet increasing demand for urban infrastructure services has become an important policy problem. Failure to respond adequately affects productivity and the quality of life in those cities. In order to make the Bank's lending programs in this area more effective, greater understanding is needed of: (a) the ways inadequate services affect business and productivity in urban areas; (b) the options for more efficiently providing and maintaining the delivery of various infrastructure services; and (c) potential cost savings from improved services. Based on empirical observations, this report suggests policy options for improving the provision of infrastructure services in Nigeria, the first country for which the Bank has undertaken this type of research: (a) regulatory changes to enable greater use of existing private capacity (for example, allowing the sale of excess private electrical power); (b) participation of the private sector in the supply of infrastructure-related services; and (c) pricing policies that are more efficient in the presence of congestion, system failures, and variations in the private provision of services.Banks&Banking Reform,Private Participation in Infrastructure,Microfinance,Economic Theory&Research,Public Sector Economics&Finance

Lock-in effects of road expansion on CO2 emissions : results from a core-periphery model of Beijing

In the urban planning literature, it is frequently explicitly asserted or strongly implied that ongoing urban sprawl and decentralization can lead to development patterns that are unsustainable in the long run. One manifestation of such an outcome is that if extensive road investments occur, urban sprawl and decentralization are advanced and locked-in, making subsequent investments in public transit less effective in reducing vehicle kilometers traveled by car, gasoline use and carbon dioxide emissions. Using a simple core-periphery model of Beijing, the authors numerically assess this effect. The analysis confirms that improving the transit travel time in Beijing’s core would reduce the city’s overall carbon dioxide emissions, whereas the opposite would be the case if peripheral road capacity were expanded. This effect is robust to perturbations in the model’s calibrated parameters. In particular, the effect persists for a wide range of assumptions about how location choice depends on travel time and a wide range of assumptions about other aspects of consumer preferences.Transport Economics Policy&Planning,Roads&Highways,Energy and Environment,Environment and Energy Efficiency,Economic Theory&Research,Urban Transport

Curbing Excess Sprawl with Congestion Tolls and Urban Boundaries

Using an urban land use model in which jobs and residences are spatially dispersed and mixed, we treat the general equilibrium of land, labor and product markets and the trade-off between labor supply, commuting and discretionary travel. We show that the decentralization of population and of jobs shortens commutes while increasing the number of discretionary trips and the time spent on them. Un-priced traffic congestion causes an excess urban sprawl reflected in an average personal daily travel time 13% or 8 minutes too long. Efficiency gains that curb this excess sprawl come from congestion tolls on traffic. To get the same travel improvement, a Portland-style urban boundary would directly limit urban size by a huge greenbelt. This entails a deadweight loss almost 70 times the efficiency gains from tolls. Urban boundaries can be efficient if urban workers greatly value the greenbelt or the urban compactness it creates as a pure public good. Nevertheless, such efficient boundaries increase congestion and tolls are still needed to reduce travel times.Urban sprawl, general equilibrium, traffic congestion, urban boundaries

The benefits of alternative power tariffs for Nigeria and Indonesia

The authors present simulation results on the benefits of alternative power tariffs for Nigeria and Indonesia, based on several closely related models of the firm. Nigeria is representative of developing countries where the public sector is inefficient and manufacturers provide their own electricity to compensate for that inefficiency. The use of private generators by Nigerian manufacturers is virtually ubiquitous, even though the government, to protect its monopoly, did not encourage that use in the 1980s. About 89 percent of a sample of Nigerian firms produced some of their power needs internally. But many large firms underused their power plants because of the substantial quantity discounts public power offered to large manufacturers. By contrast, in Indonesia, manufacturers were offered only slight quantity discounts for public power. Indonesia has encouraged manufacturers to produce their own power. About 61 percent of Indonesian manufacturers produced some power internally. Generally, in both countries firms purchase some power from the public sector at a quantitydiscount (slight in Indonesia, considerable in Nigeria) and also produce power internally at a declining marginal cost. The reliability of public power declines as the total quantity purchased increases, because transmission gets congested. Simulations confirm that an increasing block tariff is optimal in each country and produces savings in the cost of producing public power and in firms'operating costs (including the firm's cost of producing power internally). Under increasing block tariffs, firms that purchase more public power would be charged higher marginal prices than firms that purchase less. Large firms respond to the increasing block tariff by expanding their generating capacity and reducing their reliance on public power, while smaller firms contract their capacities and buy more from the public sector. When congestion in transmission persists, cost savings are higher as the increasing block tariff reduces total use of public power which in turn improves reliability. In Nigeria, where strong quantity discounts are offered, total costs savings (for NEPA and manufacturers) under 1989 conditions are about 4 percent without congestion and increase to 9 percent when there is some congestion. In Indonesia, where quantity discounts are mild, increasing the block tariff produces only slight cost savings.Anthropology,Economic Theory&Research,Environmental Economics&Policies,Energy Technology&Transmission,Windpower,Environmental Economics&Policies,Economic Theory&Research,Energy Technology&Transmission,Power&Energy Conversion,Windpower