Monday, March 4, 2013

Existence value and the greenbelt

Originally posted on 16 Sept. 2012

Last week Policy Exchange published a report calling for drastic and urgent reforms to deal with our sclerotic land planning system. They accurately point out that property prices are primarily a function of land prices, which as with all commodities are determined by supply and demand. That demand is ever-growing due to rising incomes, population growth and separating families, while the woefully inadequate supply is controlled by a rusty ‘socialist’ throwback from the 1940s. As supply has limped along behind demand house prices have soared, misdirecting the savings of the baby-boomers away from productive investments and denying the young a foothold on the property ladder.

The report makes some excellent points, but its policy recommendation is dubious. It calls for a shift away from a ‘plan-led’ approach towards an ‘externality-led’ approach, whereby those in the vicinity of greenfield development are financially compensated. This they hope will placate the NotInMyBackYard lobby’s reasonable objections and pay for the external costs imposed on them.

Calculation issues aside, this will necessarily underestimate the external cost and so lead to an over-supply of housing built on greenfield sites. The reason is that in cost-benefit analysis existence value matters. Coined by Krutilla in 1967, this refers to the value nonusers place on the existence of certain goods. As described by Kopp (1992) they are a form of pure public goods, since one person’s nonuse enjoyment – e.g. positive reflections on the existence of the Amazon rainforest – does not exclude anyone else’s. The challenge of policy analysis is how to design a system which maximises the welfare of everyone in society. So as Kopp puts it, ‘if the objects giving rise to these values are diminished, the well-being of these people is similarly diminished.’ Simply compensating those directly adjacent and in the local vicinity ignores the potentially huge aggregate existence value the rest of society places on greenbelt land. If they were willing-to-pay a greater sum to avoid development than those beneficiaries were willing-to-pay to have it, it should not go ahead. Not only that, as greenbelt developments are irreversible, the discounted present existence values of those unborn ad infinitum must also be included. 

The report quotes the totally arbitrary and wildly vague statistic that ‘only’ 6-10% of England has been developed. Wikipedia and a back-of-the-envelope calculation tells me they are unsure whether an area three times the size of London is built on or not…This should give us pause for thought, and little faith in anyone’s ability to accurate calculate appropriate compensations for heavy external costs such as these. 

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