Saturday, July 01, 2006

User-pays in new NSW suburbs

The NSW Government will charge property developers for the cost of new infrastructure provision such as hospitals, rail lines and police stations. Property developers would be required to pay $33,000 per plot which is about 75% of the cost. Victoria, the only other state to levy such charges, currently has an $8000 levy.

Opposition on the grounds that such levies will be passed on to homebuyers is not obviously sound. If land supply is relatively inelastic the charges will primarily reduce the value of undeveloped land - developing it will not longer be based so heavily on a 'free ride' at community expense. It is difficult to see how land developers can pass it on. Such charges would seem most likely to impose capital losses on land developers.

To the extent that land supply is elastic, some of the levies are borne by new homebuyers and this is a point of contention. But the claim that such levies will limit the ability of homebuyers to get into the Sydney market might be sound but, given the evident pressure on infrastructure in Sydney, that might be a good rather than bad thing. In addition, the claim than homebuyers have been able to free-ride in the past so that it is unfair to charge a levy now seems wrong if the state seeks non-wasteful outcomes. It is better to reform things noww than to conrtinue pursuing flawed policies that have generated past sunk costs.

It would be better still if new settlement met not only fixed infrastructure costs but also the congestion and pollution externalities that settlement induces. This would limit inappropriate urban sprawl - here sprawl induced by free-riding on external costs generated. To the extent that (i) infrastructure costs proxy for these environmental costs and (ii) that levies are passed on to consumers, there is an efficiency gain for Sydneysiders from efficiently pricing of the external costs.

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