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Land Use Planning Tools Lecture 3: Economics of Zoning. Zoning: Adapted from Arthur O’Sullivan, Urban Economics , chapters 10 (5 th edition) and from Bill Fulton’s Guide to California Planning Notes by Austin Troy. Land Use Controls. Are designed to address market failures

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Land use planning tools lecture 3 economics of zoning l.jpg

Land Use Planning Tools Lecture 3: Economics of Zoning


Adapted from Arthur O’Sullivan, Urban Economics, chapters 10 (5th edition) and from Bill Fulton’s Guide to California Planning

Notes by Austin Troy

Land use controls l.jpg
Land Use Controls

  • Are designed to address market failures

  • Frequently conditions for “perfect market are not met”

    • Many buyers and sellers, ability to exclude, homogeneous products, costless entry and exit in markets, perfect information, inputs and outputs fully divisible, full internalization of consequences of production and consumption, constant returns to scale

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Land use controls correct for

  • Negative externalities

  • External benefits

  • Public goods

  • Services with big scale economies (natural monopoly)

  • Merit goods

  • Equity and distribution

  • We’ll talk about these next week

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Four cornerstones of regulation

  • Comprehensive plans (see Burlington MDP)

  • Subdivision ordinances

  • Capital improvement planning

  • Zoning

    We’ll focus on the last mainly

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History of Zoning

  • Earliest zoning laws were segregationist

  • New York (1916) zoning law—5th avenue retail businesses wanted to limit garment workers; law limited growth of office buildings and garment factories; ostensibly to reduce negative effects of tall buildings

  • San Francisco- zoned out laundries from certain neighborhoods, which happened mostly to be owned by Chinese.

  • Later zoning became a means for growth management: keep new development in line with available facilities

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Major Federal Zoning Laws

  • Standard State Zoning Enabling Act of 1922

    • Sanctioned dividing of land into zones by local governments, with uniform codes for each

  • City Planning Enabling Act of 1928.

    • Created model ordinance of the general plan process, including recommended powers of planning commissions

  • These laid out model ordinances, but did not make any requirements

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State Response to Federal Laws

  • In response, many states passed their own enabling legislation confirming local police powers

  • Many states also passed comprehensive planning laws, requiring local comprehensive plans

  • Problem in early years: planning and zoning were often not coordinated, with different people doing each

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Euclid v. Ambler 1926

  • Supreme Court case on validity of local police power for zoning

  • Euclid was a small commuter suburb that wanted to forestall encroachment of Cleveland’s industry

  • Ambler owned real estate, mostly zoned industrial/commercial, but some was zoned residential .

  • Ambler claimed a taking without due process.

  • Court upheld city’s right to zone based on two criteria: legitimate public interest and due process

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What exactly is zoning?

  • Purposes: 1) limit overcrowding/ overbuilding relative to public services and facilities, 2) ‘stabilization’ of neighborhoods, 3)segregating incompatible land uses

  • Types: nuisance zoning, fiscal zoning, design zoning

  • Tools: ordinance and map (see Burlington’s map)

  • Players: Elected officials, planning commission, development review board, Zoning staff

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Burlington example




Dev. Review


DPZ Staff


Major projects

and appeals

to small projects

Comments on

and approves








City Council



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What does zoning regulate?

  • Use: activities permitted within zone

  • Bulk: envelope in which building must fit—specified through setbacks, building coverage, building heights, floor area ratio (ratio of building to lot square footage)

  • Performance/impact: performance standards, or impacts a building is allowed to produce; biggest example is parking spaces

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Nuisance Zoning

  • Classic example: used to separate heavy industry and residential zones to protect against externalities (noise, smell, pollution)

  • Separation is most simplistic way of dealing with external effects of industry

  • Problems:

    • Doesn’t reduce these effects—just moves them around

    • Spillover: an industrial zone may be far from residents in the municipality to which it belongs, but close to residents over the border

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Zoning Tools:designation

  • Zone designation/changes: geographic designation of what places are in what zone

    • Generally requires legislative approval and public hearing at local level

    • Spot zoning: grants one parcel of land a zoning different from rest of a neighborhood

  • Strengthening of general plans in many states makes it harder to manipulate zones because change must be consistent with GP

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Zoning tools:variances

  • Variances: gives landowner an exception to break some zoning rules in a zone.

    • Use variances: permits otherwise unacceptable use without change of zone

    • Variance from standards: allows use that doesn’t meet standards that others must meet

  • Ostensibly for “hardship” exemption: if some feature of land makes it impossible to make use of it under existing zoning (e.g. big boulder)

  • Courts are divided as to what is “hardship”

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Variances and planning

  • Variances are often used as a development tool, to get around established policies

  • Variances circumvent government decision making process and vests quasi-judicial powers in planning body because it is construed as administrative and not policy

  • Insidious way of shielding policy decision from public input and debate; it is really a disguised zoning change without the legislative approval

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Zoning tools: discretionary review

  • Attaches conditions to certain uses to make sure uses in a zone are compatible

  • Based on conditional use permitting: triggers planning or design commission review of project

  • Generally requires some public input

  • Used to get more leverage over developers

  • Sometimes “conditions” of use are really more like exactions

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Other zoning terms

  • Non-conforming uses

  • Inclusionary zoning

    • Density bonuses

  • Planned Unit Developments

    • Separate zoning ordinance written for one specific development; standards appropriate to that particular project

    • Often used interchangeably with “specific plan,” which is both a planning and implementation tool

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Two big problem with zoning

  • Takings

  • Exclusionary or fiscal zoning

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Takings question

  • There were many complaints and lawsuits in the initial period

  • Argument was that zoning favored some landowners over others, hence not equal protection under the law

  • Also, just compensation argument, claimed that zoning violated Fifth Amendment, which prohibits “taking” by the government without just compensation

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Takings question: three cases

  • Nollan vs. California Coastal Commission, 1987: Supreme Court ruled that Commission did not establish link between restriction and public interest in beach access case

  • Lucas vs. South Carolina 1992: Supreme Court said taking occurred, damages due to plaintiff because beachfront development regs denied owner of ALL value on property; hence must leave some value.

  • First English Evangelical Lutheran Church vs. County of Los Angeles 1987:Property owner whose land was taken by regulation is entitled to just compensation

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Fiscal/exclusionary zoning

  • Used to exclude households that impose financial burden on city, i.e. tax burden less than services consumed.

  • This is often the case for high density households, households on the fringe and new commercial/industrial development

  • Dense housing contributes less in property tax because housing is worth less

  • Exclusionary tools: setbacks, min lot size

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Backlash against exclusionary zoning

  • South Burlington County NAACP vs. Mount Laurel (1975 and 1983) court rulings were two landmark cases in exclusionary zoning

  • The first case contended that the large lot zoning policy of Mt. Laurel zoned out poor

  • Court agreed and said towns had “presumtive obligation” to zone and plan for housing accommodating variety of income groups

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Results of Mt. Laurel

  • Towns in NJ rewrote ordinances , but only had appearance of complying with ruling

  • 1983 ruling issued specific rules about how towns should be providing affordable housing; 20% of units must be for low and moderate income people—empowered a body to oversee

  • Has not been repeated in many other states

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Later zoning developments

  • Citizen participation requirements for planning (prop 20, CEQA)

  • Performance zoning

  • Inclusionary zoning

  • Transfer of development rights

  • Adequate facilities ordinances

  • Impact fees

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Performance zoning

  • Intermediate approach; it gives lower impact firms more options in location

  • This is often used for retailers or large apartment buildings to reduce their impacts on mixed-used residential neighborhoods

  • E.g. requiring parking spaces to reduce off-street parking, noise control, landscaping, street improvements to offset congestion.

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Inclusionary zoning

  • Developers get a density or parking bonus, or fast tracking in return for setting aside a certain portion of units in a development as “affordable” or below-market price.

  • Affordability defined often as less than 1/3 of income of someone earning somewhere between 50 and 80% of median income

  • Usually the affordability clause gets passed on with the title to the house, or included as a deed restriction

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Adequate facilities ordinances

  • Existence of adequate facilities (e.g. sewer, fire, water, roads, schools) becomes pre-condition for development approval

  • Often requires complex modeling to determine capacities and impacts

  • Report details where facilities are ready and where development must wait

  • Problem: what is adequate? Hard to monitor and assess consumer demand; hard to assess capacities and marginal impacts; always changing;

  • See Montgomery County, MD

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Transfer of Development Rights

  • “Macro-architecture.”

  • Example: 50 acres vacant land, 25 N and 25 S

  • City wants to have 500 new households

  • Initially, both areas are zoned for 10 units/acre

  • Policy alternative: zone south for 20 units per acre= 500 units; zone north for open space

  • Southern landowners gain at the expense of northern, because N land is nearly worthless

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Transfer of Development Rights

  • Instead city could establish a development zone (south) and preservation zone (north)

  • The south owner can develop 10/acre in the south. The north owner cannot develop on their land but has development coupons worth 250 units, which can be used to override zoning restrictions in south.

  • Then south owner can buy the coupons at market rate to put in denser development

  • This helps compensate north owner for reduction of market value of land

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Impact fees

  • In fringe land, property tax revenue of new housing may be less than cost of services.

  • This puts a burden on non-fringe residents

  • Policy options:

    • Zone vacant land agricultural

    • Impose a tax surcharge for new development

    • Levy a one-time impact fee

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Impact fees

  • Developer compensates local gov’t for fiscal burden of new development in terms of increased service use

  • If market is competitive and developer makes zero profit, cost is passed on to homebuyers, through higher housing prices, and to landowners, through lower land price

  • Often imposed for water, sewer, roads, parks, fire

  • Pricing of fees regulates type and magnitude of development

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A market alternative to zoning: effluent fees

  • An approach that deal with those problems is to “internalize” the costs of externalities—that hidden costs to society—using effluent fees

  • Fee should equal marginal social cost; if it does, then have efficient pollution level; firms reduce their pollution output based on fee, until optimal

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Effluent Fees

  • A spatial system of fees should also generate optimum spatial distribution of external effects

  • As move closer to houses, marginal external cost increases, and so fees do too

  • Therefore firm chooses location that minimizes their pollution impact relative to the added transportation costs for workers

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Effluent fee example

  • Assume

    • residents live in west side, commute to east to polluting mill

    • The longer the commute distance, the higher the wage, because of compensation for commuting cost

    • The further from the mill, the lower the effluent fee for the factory

    • Initial state: zoning policy where mill is 10 miles from residential area

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Optimum location for mill

Cost minimizing location;

Pollution cost= effluent fee

Total cost

Labor cost



Firm will locate here

Pollution cost


Distance from residential area

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Effects of effluent fee

  • Mill moves from 10 miles to 4.2 miles

  • It moves there because their labor costs are too high if they are farther away than 4.2 miles and their effluent fee gets to high if they move any closer.

  • So under zoning, they were inefficiently far from the residential area.

  • Firm will stay far out if pollution cost curve is steeper than the labor cost curve.

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Why effluent fees are rarely used

  • Setting effluent fees in complex because must estimate marginal social cost for different locations in city and must monitor pollution/externalities

  • Effluent fees may result in increased pollution in some neighborhoods

  • Zoning is simpler