Coase, spatial pricing and self-organising cities

Abstract

Modern computational techniques offer new horizons for urban economics in the form of agent-based simulation frameworks. This paper reports on a cellular automata (CA) simulation in which urban land transforms on the basis of locally optimal bargaining between developers and local communities (local governments). Because CA is an explicitly spatial modelling methodology, the space-time-specific paths to global equilibrium can be observed. Because it is an atomistic methodology (cells represent decision units), it is suitable for articulating microeconomic theories of urban processes including planning. We present a space-time-specific simulation of cities evolving under two alternative planning regimes. In one, the community has property rights and uses planning conditions, planning gain, impact fees and so on to ensure that each development occurs at a socially optimal density. This is a theoretically simplified rendition of the British development control system-simplified in the sense of acting from a position of perfect knowledge and having a single objective of optimising locational externalities. In the other simulation, developers have the right to develop but the community is allowed to make (rather than receive) compensatory payments in order to achieve socially optimal land-use patterns and densities. Decision-making in both systems is local and socially efficient. However, case-by-case ad hoc development control with compensatory exactions has the effect of steering development to the least-polluting locations. Although socially optimal densities can occur under alternative control regimes (as the second simulation demonstrates), the stylised British development control process acts like a decentralised locational pricing system and, by definition, yields a superior land-use pattern than any other style of planning system. At one level, our model articulates the Coasian invariance theorem-the same partial equilibrium outcome can be achieved whichever way the property rights (over land development) fall. At another level, the results demonstrate that in a spatial resource allocation problem such as land-use planning, global equilibrium is not independent of property rights. The total social product in the urban land economy is greater when the community holds rights over development.