A Critique of 'The Social Cost of NIMBYism'

Matthew Kiefer knows NIMBYs (Not-in-my-backyard). His essay on the social function of NIMBYism may be the best description of the phenomenon I’ve read. It is a dispassionate, clinical assessment by a physician who has seen this condition too many times.

Kiefer accurately diagnoses NIMBYism’s root causes. Homeowners’ hold a highly leveraged position in their largest asset and lack diversification against risk. New development, any threat to the status quo, is bound to make them queasy (Kiefer wrongly characterizes this risk aversion as irrational, though; risk tolerance is a preference like any other).

Kiefer ultimately concludes that, despite its bad name, NIMBYism serves an important social function by mediating between new and old development:

In an improvised and very democratic way, it forces mitigation measures to be considered, distributes project impacts, protects property values, and helps people adjust to change in their surroundings. It is a corrective mechanism that, if allowed to function properly, can even help to preserve a constituency for development.

NIMBYism works, Kiefer argues, because it allows developers and neighbors to bargain. Allowing neighbors to influence project design mitigates the harshest impacts on the neighborhood, reducing the risk to property values. Requiring developers to provide in-kind benefits such as park improvements compensates the neighbors for the inconvenience new development inevitably brings. NIMBYism thus reconciles new development with old.

This is where Kiefer and I part ways. Relying on bargaining between developers and NIMBYs would be efficient in a world where developers enjoyed all the benefits and neighbors bore all the costs of new development. But we live in a world where new development produces spillover benefits. New buildings and homes allow cities to grow, fueling their innovation and prosperity. Private side deals inevitably ignore these benefits.

NIMBYism as bargaining
In theory, bargaining between developer and neighborhood could ensure that the “right” projects get built. When a project's benefits to the developer exceed the cost to the neighbors, the developer has an incentive to modify the design to placate the neighbors. When the project's costs to the neighbors exceed its benefits to the developer, the neighbors have an incentive to reject the developer’s offers; the project dies on the drawing board.

Even under the best of circumstances, some developments that ought to be built won’t be when neighbors hold a veto.

First, developers cannot or will not compensate neighbors with cash. They must resort to barter which can be particularly hard with rich neighborhoods who might have all the parks, fountains and litter patrols they want.

Second, giving neighbors control over the details of a development can be expensive, drawn out and contentious, especially once the lawyers get involved.

Finally, neighborhood representatives are usually drawn from those who are most fervently anti-development. There are plenty of new developments — a drug store, for example — that the majority may silently welcome. But because those with an idiosyncratic hostility to new development run the show, the “neighborhood” insists on too much compensation.

None of these would be an insurmountable objection if all that were at stake were the developer’s return on investment and the neighbors’ concern for their home values. Bargaining between developer and neighbor likely would work as well as any other system. But there is more at stake. New development often generates valuable benefits for the rest of us that don’t show up in the developer’s pro formas. The loss of these benefits is the real cost of NIMBYism.

Cities and economies of scale
Cities are all about economies of scale. These economies of scale fuel the innovation and prosperity that cities offer, and largely explain why America’s urbanized population has steadily increased as a percentage of the whole since 1800.

Thanks to these economies of scale, metropolitan areas offer a variety and diversity of experiences unattainable in small towns and rural communities. We have known since Adam Smith that the division of labor is limited by the extent of the market. The larger the city, the bigger market; the bigger the market, the more diversification and specialization the market can support. It is for this reason that large cities offer more specialized restaurants and shops, more music and fine arts, more museums, more of virtually amenity, than small cities. If variety is what one is after, bigger is better.

But NIMBYism systematically restrains the very growth that fosters these amenities. It does so principally by closing the door to new residents who might otherwise spark greater specialization and diversity. Recent economic research by Glaeser, Gyourko, Eischer, Cox, O’Toole and many others has demonstrated that overly restrictive land-use regulations reduce the supply of housing in markets like San Francisco and New York City, thereby driving up home prices. NIMBYism guarantees that these regulations have bite. In the process, NIMBYs keep their cities too small.

Of course, cities offer more than specialized shops and restaurants. Cities make firms and workers more productive. There are tremendous returns to scale when firms and workers in an industry cluster together. Firms become more productive as their suppliers cluster nearby and as they gain access to a deeper pool of skilled labor. Workers become more productive, too: A software developer is more productive in San José than in Lubbock because a lot of learning takes place just by hanging around with other people in the same trade.

When NIMBYs successfully fight off a new development, the developer simply looks elsewhere for a profitable opportunity. When we rely solely on bargaining between developers and neighbors to decide what gets built, we guarantee that too little gets built. This is how a city like San Francisco ends up with a median home price of $750,000 (even in 2008's market). Cities like San Francisco and New York are too small. Institutionalized NIMBYism bears most of the blame.

I do not mean to suggest that all growth is good. Kiefer cites examples — Washington’s Mt. Vernon and the Cape Cod National Seashore — where development certainly would inflict more harm than good but institutionalized NIMBYism protects too much. We are all the worse for it.

Solutions?
Having criticized Kiefer’s proposed solution, I suppose I should offer my own. But I do not have one. NIMBYism is a deep, structural market failure. It is the consequence of many people acting in a perfectly rational manner. This explains its persistence despite the undeniable damage it inflicts on consumers, firms and workers. If anyone does know how to fix this problem, he or she has yet to speak up.

Chris Bradford is a 1992 graduate of the Yale Law School, where he was an Olin Fellow in Law and Economics. He is an attorney at Clark, Thomas and Winters, P.C. in Austin, Texas.