Wednesday, March 24, 2010

Open Space

I recently found a document online that is interesting to me because it might have an effect on my "horse showing way of life" directly; along with any eventers (type of horse showing that I do), this plan might effect people living in this area of Highlands Ranch. This document was created for a public meeting, which was to address several issues that are in the planning stages at the equestrian park. These issues include the development of a new fence around the park, and new service center yard lights; along with these issues the document highlights some overall concerns of the plan with Spring Gulch Equestrian Area.

I found the concerns to be the most interesting part of this document. The document claims that there was at least one concern, issued by homeowners in the Highlands Ranch area, about "Residential property was purchased because it faced open space [and] loss of property value due to development of the open space behind home."

These concerns are similar to some of what we have talked about in class these past weeks; the idea of open space causes an externality. That is, the people who buy the houses are usually willing to pay more money to have access/view/closeness to open space. This extra money paid for the property backing the open space is the market responding to this externality. So because people are willing to pay more for land near open space, they believe that their property is more valuable because of the open space. I think that the land is more valuable in the eyes of the particular land owners, but not more valuable to the market in general; I also think that their property value will not go down because the open space is being developed or changed in some way. So, if a resident purchased property because it faced open space and at some point this open space is different or changed in some way then this person should move to somewhere else, maybe somewhere where there is more "satisfactory" open space. The fact that some people believe that their property value will go down, or that they will be unhappy because their property no longer faces the open space they "fell in love with" is a reason to stop the Spring Gulch Equestrian Area plan is just crazy.


mdehn said...

Wouldn't this problem relate back to the discussion of Coase's Theorem? If the land owners aren't happy, then they would be able to pursue legal action to be compensated for the building of this new equestrian park, assuming that these transaction costs are worth it to the land owners?

Larry Eubanks said...

Yes, this seems a pretty good situation for the Coase Theorem to be relevant, although probably not through pursuing legal action. Instead, the unhappy landowner could offer to pay for the developments not to proceed. If the unhappy landowner cannot pay a sufficient amount for this to happen, then the implication would likely be that the development was the most highly valued use.

One thing about the Coase theorem is that it implies that what might otherwise appear to be an externality will be internalized and therefore there is no externality. We want "externality" to mean market failure, and the Coase Theorem, when it is applicable, implies no market failure. I think the kind of open space issues that relate to having a residence near open space are capitalized in markets, and hence there is no externality associated with open space in general.

However, the issue at hand perhaps has a few more conceptual nuances. The neighboring land owners cannot be said to be harmed, even if they consider themselves worse off, by the development UNLESS they have a property right to see what they want to see. If that were the case, then the development actions would be harmful and the person causing these actions could be sued for damages. Typically economic efficiency analysis neglects this and only looks at whether the neighboring land owners says they will be worse off. I think this is an important weakness of efficiency analysis from a normative point of view.

An additional issue involves the point that a market failure must cause an allocation which is inefficient. It seems to me possible that the development in this case could mean that the neighbor's property, which he valued say at $450,00, was reduced in value to the neighbor to say $410,000. But, it could also be the case that no other person would be willing to pay more than $400,000 for that parcel of land. In other words, the most highly valued use of the land is still the same land owner, even though he values it less now. The development would not imply a different allocation the land parcels, and thus even if the neighbor did now value his home less there need not be efficiency implications.

Still another conceptual complication of this issue could arise if the open space parcel is owned by government. Government certainly has the power to say how it uses its lands, and it also has the power to say to the neighbor that even if you thought the open space would never be developed, sorry, we changed our mind. In this case, I doubt the neighbor would have legal grounds to demand compensation.