Monday, December 11, 2006

Coastal development?

The coastal town I am staying in - Ulladulla NSW – is facing conservation dilemmas. My guess is that these dilemmas arise in every coastal town on the eastern seaboard – and perhaps every area of scenic beauty in Australia (and perhaps the developed world!). Rising standards of affluence and increasing numbers of retirees mean that citizens do not need to live in highly urbanized settings. They have the alternative of ‘Sea-Changing’ to currently quieter, more scenic living.

The problem is that huge numbers of people want to do exactly that. The market-response is to drive-up the cost of housing in such scenic towns. The ordinary suburban home opposite to the house we are staying in is on the market for $1.3 million and there is a great deal of real estate around here much more expensive than that. Renting a house down the road over the summer will cost you $3,000 weekly.

Ulladulla has just agreed to allow a 6 storey block of apartments to be built above its harbor area – more than double the height of any building in town. This is a natural market response to high demands to live in the town. Some locals are happy about the development which they see as progress which will drive up their own property values. Others focus on the traffic and congestion that such development will bring that might reduce their amenity values and perhaps their property values as well. (Of course greenies who seek to enforce maximum height regulations also put pressure on land prices and encourage resort-sprawl!)

Some of these developments can be dealt with via appropriate local government management policies. Reducing traffic flows in town could be achieved by diverting ‘through’ traffic around the town – the costs of doing this might be levied as a tax on the proposed unit developers who generate the external costs although, in practice, it won’t be. Efficient pricing of congestion externalities is a big enough call in large cities where specialized economic advice can be provided – it is an unrealistic dream in small town Australia. Alternative more practical policies might include increased parking levies in the streets affected by the development, traffic bans and so on. The general idea is to internalize the external costs induced by the development. If this is done then a deal leaving established and new residents each better-off on average can be achieved. My guess is that even these more down-to-earth policies are likely to be rejected by local pressure groups – parking charges, for example, are likely to be opposed by retailers and small business in the town centre.

There are numerous effects not captured by standard economic models. Allowing the constructing opens the floodgates for a stream of similar developments fostered by local landowners seeking to have their land transformed into higher value uses. Each of these developments imposes amenity costs on the broader community while obstructing such developments promotes the interests of those already living here at the expense of those who would like to. A win-win solution seems impossible without some way of internalizing external costs and compensating pre-existing residents although this seems rather academic and unrealistic.

I am uncertain where to turn on this one. The east coast of Australia is fast turning into a ribbon of urban development and much of its natural beauty is being destroyed. This is not occurring as a consequence of malice but because people – such as myself – like to visit and live here. Regulatory and planning remedies often have an elitist flavor that no libertarian would find appealing. But areas of natural beauty are being spoiled and, from any reasonable perspective, over-developed. What is sensible and attractive for an individual home unit vendor and purchaser involve substantial external costs for the rest of the community and yet it seems impractical to recoup these costs.

The planning issues here are not straightforward. The interests of newcomers need to be balanced against those of preexisting residents in much the same way that we think of devising plans for admitting external migrants into Australia. Having more people coming to Australia (to a local town) provides economic benefits in terms of improved gains-from-trade but, at the same time it creates external costs. The best guarantee for a win-win plan is to require all people to pay the external costs they generate and for the newcomers to compensate preexisting people for the extra costs for the charges they impose on them. It is coming up with practical proxies for this theoretically precise procedure that involves real problems.

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