November 17, 2003

On positive externalities

Patrick Crozier | Positive Externalities

On Samizdata (as previously mentioned) Perry de Havilland discusses the EU’s decision to ban French local governments from subsidising Ryanair’s landing charges. As I mentioned, Ryanair is being subsidised because (it is reckoned) the money it brings in outweighs the cost of the subsidy

An externality (as I understand it – I’ve always been rather shaky on technical terms) is a cost or a gain borne by others and not by the economic actor himself. Externalities can be positive or negative. We normally think in terms of negative externalities - pollution being the classic example. But they can be positive and in transport positive externalities crop up all the time. Usually they take the form of an infrastructure project where the project itself loses money but nearby land values experience a sharp one-off increase.

There are all sorts of examples of this effect. The one I keep mentioning, is the Jubilee Line Extension in London. The line itself cost £2.5bn. London Underground, who built it, are unlikely to ever see a penny of their investment. But land values close to the stations sky rocketed. One estimate puts the aggregate increase at £13bn.

But there are all sorts of other examples. Exactly the same happened in Dublin with the building of the DART. In Britain the Metropolitan railway took advantage of this effect to build John Betjeman’s beloved Metroland. In Japan private railway companies have used their lines to diversify into residential housing, commercial property, shop, hotels and resorts. In recent years the newly-privatised JR Central has followed suit erected the enormous JR Central Towers in Nagoya. Hong Kong is doing much the same. In London, a consortium is proposing to defray at least part of the costs of building CrossRail by re-developing its stations.

For ages I thought this effect only applied to railways but it seems it applies just as much to airports. I have already mentioned the situation on the continent but precisely the same thing has been happening in the West Country in England.

I am not sure if it applies to high-speed railways but I wouldn’t be surprised if it did.

It is quite a bizarre effect. As I said over a year ago:

Isn't that odd? Isn't it odd that the main financial beneficiaries of an underground line are not the people who build them but the people who own property nearby? I cannot think of any other service that works in that way. When I go out and buy some fish and chips it isn't the little old lady who lives next door who thinks "Golly my house is worth so much more!" But if the chippy were replaced with a tube station she would be.

Why is infrastructure different? Maybe, we are looking at things the wrong way. We think of passengers as the customers and therefore the railway as the would be beneficiary. But maybe this situation is far more analogous with a telephone connection (broadband nowadays) or gas, or electricity, or a water supply. A water supply is a pretty important factor in the value of a piece of property. Because you can get water to it. Likewise a tube connection. Because you can get people to it.

But doesn’t it blow a hole in my belief in free markets? Isn’t it the case that in a free market none of these things would ever get done? No enterprise would be big enough to buy up all the land near a station or an airport and even if it could it would be stymied by the “hold out” problem. Surely, better to leave it up to government to do the compulsory purchase, built the link and tax the land value gains. This is certainly a popular way of thinking.

I disagree. First of all, leaving the state in charge just leads to all the usual problems of political horse-trading, feast and famine and cost over-runs. Secondly, there is the fundamental injustice of it all. Some landowners might not want to live near a tube line or whatever. Yet not only will they have to put up with it but they will also be forced to pay for it.

But that still leaves us with the problem of actually getting these things done. The blunt approach would be to buy up nearby land - though that could prove extraordinarily expensive. An alternative that I have suggested in the past (and one that I think might just work) is to have a voucher scheme.

Update - 14/08/04

It occurs to me there might be another way of making this work. You'd need an agency. This agency would have to be entirely neutral. It would attempt to contact every land owner in the country and ask them how much they would sell their land for. The contract would last for some fixed period of, say, a year or so.

Organisations seeking to build roads or railways, or capture their land value gains would approach the agency and ask the agency to quote them a price in the knowledge that should the price prove acceptable they would be able to buy up the property almost immediately.

Why isn't this already being done? Why hasn't it been done in the past? Well, it is, of course, possible that it can't be done but I suspect that at least one of the reasons it hasn't been done in the past has been the ever-present prospect that the government itself might act either by subsidy or compulsory purchase. In more recent times buying up the land has been the least of the problems. Getting permission to build has been far more difficult.

What if someone else wanted to buy the property later on? They could but only if they were prepared to pay the developer's price. Bearing in mind that the developer intended to make a healthy profit out of his development this price would be likely to be a high one.

Trackbacks

Comments

I guess my questions (and these are questions) are:

1. How is a voucher system different than a Local Improvement District (to finance a common improvement)?

and

2. How does a voucher system dispense with the 'free-rider' problem?

Posted by David Sucher on November 19, 2003

Forgive me if I'm making an obvious point about the hold-out problem, but in practice wouldn't a developer begin by buying options on the property? What the developer needs to do is sketch out two or three alternative routes. He then agrees options to buy properties on all three routes from the existing land-owners. This is expensive, but presumably the land will be worth potentially a great deal more if the project goes ahead. The existing land-owner is faced with a tempting prospect: a cash sum now, if he agrees to part with his property for a generous sum at a later date. This greatly reduces the temptation to hold out; attempting to hold out will encourage the developer to take a different route. Meanwhile, his less grasping neighbours would get to keep their property *and* the cash payout from the option contract. The threat of being bested by one's neighbour would be a powerful disincentive to holding out.


Sure, it's more expensive than compulsory purchase, but confiscation is hard to undercut.

Posted by Crosbie Smith on November 19, 2003

The threat of being bested by one's neighbour would be a powerful disincentive to holding out.

I think the holdout problem really applies in situations where this is not a possibility - for instance if all possible routes between A and B must pass over land currently owned landlords 1-10, so that building a detour round a holdout is not an option.

An alternative solution is to use proxies to buy land in secret, so that landowners, unaware of what the purchaser wants to do with the land, don't realise that there is an opportunity to raise the price by holding out.

I have a conjecture that the reason this isn't seen in practice is that the possibility of being refused planning permission makes the strategy unacceptably risky for an investor. Abolishing the need for planning permission would then mitigate the holdout problem. Unfortunately, I don't know enough about real world examples to test that conjecture.

Posted by Andy Wood on November 19, 2003

Permalink
 
 IN BRIEF

November 23, 2004

'Captain commuter' wins Sydney a free day on the trains ...link
PCCC | Comments (0)

Darling's saver ticket for slow-train Britain - he's going to do everything but close them ...link
PCCC | Comments (0)
November 21, 2004

Tollroads Jamaican style - worth it if only for the pic of the toll plaza ...link
PCCC | Comments (0)
November 20, 2004

Postive externalities come to DC - sort of ...link
PCCC | Comments (0)

Railways safer than ever - says Christian Wolmar ...link
PCCC | Comments (0)

Is graffiti art? - LFTTR think the question misses the point. FWIW I think many artists clearly have a lot of talent and it's a shame they don't have an appropriate, nay, legal outlet. ...link
PCCC | Comments (0)

Book review - Subterranean Railway by Christian Wolmar ...link
PCCC | Comments (0)

One airline, 4 crashes, 8 dead: the real price of sugar snap peas in November ...link
PCCC | Comments (0)
November 17, 2004

British Transport Films Collection DVD Volume One - Surely a must for any transport afficionado. It will be released just in time for Christmas. ...link
MH | Comments (0)
November 15, 2004

Crossrail website ...link
MH | Comments (0)
November 11, 2004

Brake fault forces Virgin to cut speed on flagship tilting trains - you know, just for once it sounds as if the HSE could be right ...link
PCCC | Comments (0)
November 08, 2004

TV Alert "When trains crash", 1930 Channel 5 tonight. Talk about timing ...link
PCCC | Comments (1)
November 07, 2004

Ufton Nervet crash - 6 now confirmed dead ...link
PCCC | Comments (4)
November 06, 2004

One person dead as train derails ...link
PCCC | Comments (0)
November 04, 2004

FirstGroup wants to add the tracks to its trains - that's brave ...link
PCCC | Comments (0)
November 02, 2004

Car charge to rise to £6 ...link
PCCC | Comments (0)
October 30, 2004

Psst wanna buy a railway station? ...link
MH | Comments (0)
October 26, 2004

'Kart Vader' - He tears around Quebec City at 100mph. In a go kart. At night. Wearing black. And he films it. Spotted by Jay Jardine. ...link
MH | Comments (0)
October 24, 2004

The downside of auto-mobile bans - drivers text instead ...link
PCCC | Comments (0)

Councils ban shrines to road crash victims - a story that neatly combines both transport and the issue of the day: mawkish sentimentality ...link
PCCC | Comments (0)
October 20, 2004

The air hostess, the long hair and the sun roof - one of the more imaginative ways of staying awake at the wheel. ...link
PCCC | Comments (0)

Wheelchair-using MP travelled in 'cattle truck' - so, that's just the same as the rest of us then ...link
PCCC | Comments (1)

23 escape from burning train ...link
PCCC | Comments (3)

Wikipedia accuracy under fire - so, it's back on with the Glossary? ...link
PCCC | Comments (0)
October 19, 2004

Rail chief quits after four months - walking away from £130,000. Golly ...link
PCCC | Comments (0)
October 14, 2004

New comment on old posting - Tim Hall explains the story of the Highland Railway, its new locos and its soon-to-be-ex-Chief Mechanical engineer ...link
PCCC | Comments (0)

Out now: DVD version of leaves on the line ...link
PCCC | Comments (0)
October 13, 2004

New link - Transport Watch UK. Lots of facts, lot of comparisons. Doesn't look good for rail ...link
PCCC | Comments (4)
October 11, 2004

Take the car and save the planet - walking kills, apparently ...link
PCCC | Comments (0)

Hybrids better than the real thing - golly ...link
PCCC | Comments (0)

Don't invest in mega-projects - says Peter Gordon ...link
PCCC | Comments (0)
October 05, 2004

Prescott backs plan to reopen branch rail lines - well, he says he does ...link
PCCC | Comments (1)
October 04, 2004

New Glossary Entry - the Advanced Passenger Train ...link
PCCC | Comments (0)
October 03, 2004

People are building their own speed cameras - One fellow is even selling fully functioning ones ...link
MH | Comments (0)

Pendolinos and Voyagers may prove to be one of privatisation's disasters - says Christian Wolmar ...link
PCCC | Comments (11)

Omedetō gozaimasu! - Tech Central Station on the 40th anniversary of the Shinkansen ...link
PCCC | Comments (0)
October 02, 2004

Compulsory purchase to go - in US? Johnathan Pearce has some musings ...link
PCCC | Comments (0)
October 01, 2004

Indian railway runs out of wheels - because it refuses to import ...link
PCCC | Comments (0)

All for sprawl - Tyler Cowen links to a couple of articles including one from the NY Times magazine which is attracting a lot of attention ...link
PCCC | Comments (1)

Underground maps as art - according to Brian ...link
PCCC | Comments (0)
September 30, 2004

Recent comment - Uncle Roger on the difficulty in working out accurate subsidy figures ...link
PCCC | Comments (0)

Europe by train - Tim Hall on Stephen Karlson's adventures ...link
PCCC | Comments (0)

Carpool lanes = communist gulags - Tim Hall is beginning to get it, possibly ...link
PCCC | Comments (0)
September 29, 2004

P&O axes 1,200 jobs as ferry travel sails into past ...link
PCCC | Comments (1)
September 27, 2004

Hurtling towards a £7.6bn bill at full tilt - Alistair Osborne on the WCRM fiasco. Actually, I thought £7.6bn was on the low side ...link
PCCC | Comments (2)
September 26, 2004

A double-decked shame - RJ3 laments the passing of the Routemaster. It's those EU bastards, I tell you ...link
PCCC | Comments (0)

Tilting trains are rubbish - according to Ross Clark. Now he tells us ...link
PCCC | Comments (2)

Delays plummet by 28% - says Network Rail ...link
PCCC | Comments (0)
September 25, 2004

New glossary item - the Health and Safety Executive - in which I demonstrate my almost complete ignorance of this institution ...link
PCCC | Comments (0)

Scant improvement in train times - according to latest figures ...link
PCCC | Comments (0)
September 22, 2004

EU plan will hit safe women drivers - and it's all in the name of sex equality ...link
PCCC | Comments (0)

Unions gang up to demand railway renationalisation - they mean it isn't already? ...link
PCCC | Comments (1)
September 21, 2004

Top car makers support road-jam charging - Ford, GM, Honda, Daimler ...link
PCCC | Comments (0)

Journey times cut as 125mph tilting train sets record - after £8bn and the odd bankruptcy tilting trains that actually tilt are finally here ...link
PCCC | Comments (0)
September 18, 2004

ABD calls for environmental audit of public transport - all those particulates ...link
PCCC | Comments (2)

Camera Partnerships must come clean on real causes of accidents - says ABD ...link
PCCC | Comments (0)
September 16, 2004

The Green Quadratic - ASI paper on planning from 1988. Now available on-line ...link
PCCC | Comments (0)
September 14, 2004

Up with conductors - they're really good, you know ...link
PCCC | Comments (1)

Speeding Britons fined in car race to Spain - "Among the cars were Ferraris, Porsches and Rolls-Royces." ...link
PCCC | Comments (0)

MPs to lose free airport parking - oh, how my heart bleeds ...link
PCCC | Comments (0)

The case against driving licences - Paul Clark in Lew Rockwell ...link
PCCC | Comments (0)
September 10, 2004

Drivers trade privacy for insurance discounts ...link
PCCC | Comments (0)
September 08, 2004

Free mints infuriate delayed commuters - some even threw them away, ingrates ...link
PCCC | Comments (1)

Privatize the roads! Liberate the streets! All we have to lose are our parking tickets! - Anthony Gregory in Lew Rockwell ...link
PCCC | Comments (0)

M6 Toll hits 10m journey mark - er, about a month ago ...link
PCCC | Comments (0)
September 07, 2004

California high-speed rail plan - all sorts of claims being made but Peter Gordon doesn't like the precedents ...link
PCCC | Comments (0)
September 06, 2004

Swedish farmer fined 1,211 kronor for illegally parking a snowmobile in Warwick - Krister Nylander lives 205 north of Stockholm and has never been to Warwick. "They can wait till Hell freezes over and I can get to Britain on my snowmobile to pay the fine.” ...link
MH | Comments (0)
September 05, 2004

"Obsession is not too strong a word to describe how railway enthusiasts feel about railways" - Matthew Parris goes to Peru and meets some trainspotters ...link
PCCC | Comments (0)
September 03, 2004

Hidden costs do not justify the level of tax on petrol in Britain - says Graham Seargeant ...link
PCCC | Comments (0)

Shovelling cash - utilities to pay for digging up roads ...link
PCCC | Comments (0)

Alistair Morton, builder of the Channel Tunnel, is dead ...link
PCCC | Comments (0)

Government 'willed' Railtrack to fail - says Corbett ...link
PCCC | Comments (0)

Cyclists saddled with seafront speed trap - in Bournemouth ...link
PCCC | Comments (1)

Historic Amsterdam tram photos Aaaah. Where's amg going to pitch up next? ...link
PCCC | Comments (0)

Why so little US electrification? - Tim Hall ponders the answer ...link
PCCC | Comments (0)
September 02, 2004

London Underground Map - as it really is. ...link
PCCC | Comments (0)

Electric v steam - in 1923. But who won ...link
PCCC | Comments (0)

Freight or passenger in the US? - they're in conflict. Stephen Karlson considers the options ...link
PCCC | Comments (0)
September 01, 2004

Fares and charge up in London - says Livingstone ...link
PCCC | Comments (0)

'Fair fines' planned for speeding drivers ...link
PCCC | Comments (0)

Railtrack is cleared over Hatfield crash ...link
PCCC | Comments (0)
August 31, 2004

Thousands 'ready to quit Aslef' - where would we be without brotherly love ...link
PCCC | Comments (0)
August 30, 2004

Rural watchdog attacks road sign blight - See it's not just me who can't abide the avalanche of street furniture. ...link
MH | Comments (0)

What the traffic will bear - Bob Poole discusses the merits of tolling ...link
PCCC | Comments (0)

Prague trams - photos. Aaah ...link
PCCC | Comments (0)
August 24, 2004

What if you can't drive? - Catallarchy's Sean Lynch considers the options ...link
PCCC | Comments (0)

97% of accidents within speed limit - according to the ABD ...link
PCCC | Comments (1)
August 22, 2004

Prosecute motorway lane hogs - says RAC ...link
PCCC | Comments (3)
August 20, 2004

Radio tags for congestion charge? ...link
PCCC | Comments (0)

World's longest road opens - in Russia ...link
PCCC | Comments (0)

Sprawl is cheap - says Iain Murray ...link
PCCC | Comments (1)
August 19, 2004

Strike threat to BA and Eurostar ...link
PCCC | Comments (0)

Toll roads are safer - at least according to my reading of this Marginal Revolution post ...link
PCCC | Comments (0)

Peking metro to hit 1000km mark - I'm not sure even London's is that long ...link
PCCC | Comments (0)
August 15, 2004

Squander Two calmly talks about speed cameras ...link
MH | Comments (1)

Parking anarchy in St Albans - Police withdraw traffic wardens, Herts council won't have any until October, it's bedlam! ...link
MH | Comments (0)

The future of transport - as seen from the past ...link
PCCC | Comments (0)

Trains less efficient than cars - yes, I know, it's old news ...link
PCCC | Comments (0)

Ferry solution, please - Eamonn Butler wonders how you could introduce competition to a subsidised ferry service in the Western Isles ...link
PCCC | Comments (0)
August 14, 2004

Drink less, speed less, save on insurance - Marginal Revolution has the story ...link
PCCC | Comments (0)