In her new book Perverse Cities: Hidden Subsidies, Wonky Policy, and Urban Sprawl, Pamela Blais explores the impact of flat-rate fees for development charges and network services like sewer, water, and cable. She explains in detail how these little-discussed policies play an important role in shaping development and redevelopment and how the current funding of these network goods incentivizes large lot, greenfield development over infill development on smaller lots.
Blais focuses her analysis on Canada and the United States. Development charges provide an easy inroad into her critique of average cost over marginal cost pricing for infrastructure. Many North American municipalities charge developers a flat-rate fee for each lot they develop. They often set this fee at the rate for lots of varying sizes, even though larger lots require more asphalt, sewer and water pipes, and cable to service them. While the cost differences may be small between one 25-foot versus one 60-foot lot, infrastructure for a new suburb of 100 houses will cost significantly more if the houses have 60-feet of frontage versus 25, but because these costs aren’t reflected in prices, residents don’t take them into account. Because the same development fee will be capitalized into each house, those who live on smaller lots cross-subsidize the services like road maintenance, garbage collection, and snow clearance of those who live on larger lots when these services are provided by local governments.
Blais provides detailed accounts of how these fees shape development patterns and that the resulting sprawling development is both environmentally detrimental and expensive for cities to maintain. She points to several network services that fit a model similar to development charges: water and sewer, electricity, gas, telephone, cable television, internet connectivity, and postal service. While she cites extensive empirical evidence that the cost of delivering these services is inversely related to population density, local and federal governments tend to charge flat rate fees for these services per lot, creating a situation in those who live on small lots provide substantial subsidies to those living on larger lots.
Blais advocates a model in which user fees are set as closely as possible to the actual costs that each household imposes on its municipality, which would significantly improve incentives compared to the current system. She doesn’t discuss subsidies that run the other way, though, benefiting residents in center cities at the expense of those on the fringe. For example, residents in center cities may live near a subway station and use it frequently. Train systems are typically subsidized by the taxes of suburban residents of the same city who may rarely use the train system, and capital costs of transit systems are often paid for by federal taxpayers who receive little if any benefit from transit systems. Blais sees setting user fees close to actual costs as a tool to encourage more compact development, so she selects only examples in which city-dwellers cross-subsidize those in the suburbs rather than the other way around.
While I think Blais provides a clear and detailed account of the side effects from funding network services with fees set at average costs, my primary critique of her work centers on her use of the word “efficiency.” First, she uses the word in the sense that economists call pricing “efficient” when the price of a good is equal to the marginal cost to suppliers of providing that unit. But she also uses “efficient” to describe dense development. While denser development is more efficient in the sense that it uses less land, Blais doesn’t make clear that sprawling development can be efficient in the economic sense if people are willing to pay the full costs of this type of development. Blais seems to draw much of her support for setting user fees equal to marginal cost from a 2002 paper by economist Donald Dewees. Both Dewees and Blais come from the perspective of increasing allocative efficiency within the model of municipalities or regulated monopolies providing the same services that they do today. However, this static view doesn’t factor in that private sector firms are driven to relentlessly search for ways to reduce their production costs and improve the quality of the services that they offer over time through innovation. Not so for monopolists protected from competition, which is why many people celebrate the arrival of private services like cable killers, VoIP phone providers, and ISPs that don’t bundle their services with cable that will save them from having to deal with the protected monopolists that will never match the prices of competitive markets. While marginal cost pricing would introduce efficiencies over the current system, greater gains are possible by allowing the market to provide these services rather than attempting to set prices as the market would. While competitive provision of water supply and wastewater treatment are unlikely in the near term, existing Business Improvement Districts provide a model for voluntary public space maintenance and improvements that improve upon that provided by municipal services.
While I found a few pieces of Blais’ analysis frustrating, I learned a lot from her book and highly endorse her approach to looking at prices, rather than regulation as the key to improving development outcomes. She succeeds in bringing attention to an under-discussed and important issue in the tangle of policies that shape urban development. Setting municipal service fees at marginal cost would be a significant step toward market-based development.