Tuesday, March 4, 2008

Confusing Supply with Demand

This act of arson, apparently an example of 'eco-terrorism,' has me thinking that the perpetrators (assuming environmental motives) got the economics wrong. The irony that this supposedly environmental act has led to many more wasted resources than has been well noted. I think it is also true that if this is an attempt at raising awareness - they could have done almost as well using Greenpeace-style tactics (i.e. non-destructive). But what strikes me is that the problem, should they want to address it, is demand not supply. By attacking the supply, sure you could make it marginally more expensive (decrease supply temporarily, increase insurance costs), but the resulting decrease in quantity of large homes transacted will be inconsequential. In fact this just adds more pressure to develop rural lands because the demand remains but the supply is diminished. So what should be addressed is the demand for these houses. But of course, the solution to lower the demand for these houses is complicated and requires government - something these groups have seemed to have given up on, but the raison d'etre of The Oregon Economics Blog.

So, other than protecting certain lands from development, what can government do? Pigouvian taxes to get the real social and environmental costs reflected in the price of the house is one way, increase the desirability of living closer to the center (transit, investment in downtown areas, incentives for high density development) and promotion of business investment to concentrate jobs in core areas, are others. Other creative ideas out there?

1 comment:

Jeff said...

I wonder why the environmental group bothered with a handful of $2,000,000 houses in the country. It seems like only a tiny fraction of the population can purchase a $2,000,000 house and pay the exorbitant taxes and utilities that go along with such a property.

I wonder how the carbon emissions of such a property compare to a cross-country flight on a jet airplane. Could the latter be even worse than heating a 4000 sq ft for 5 months of the year?

You're right about the Pigouvian taxes. Clearly, taxes on natural gas and electricity usage could reduce the size of houses. Higher gas taxes could reduce sprawl.

As for other ideas, a local government has some direct control over the size and placement of new housing.

The most direct control is the System Development Charge (SDC). For example, in Corvallis a new home builder may have to pay a $25,000 SDC to account for the expenses associated with extensions to the water and sewage systems. They tailor the SDC to the house - including the number of faucets, and how far uphill you live from the water source. Bend, OR has had extremely low SDCs, which goes a long way in explaining its overdevelopment. I've heard that Wilsonville has SDCs ranging up to $75,000, however, which has restricted development and raised the prices of homes.

Property taxes are another direct means of control. Of course, these are usually subject to voter approval, so maybe there isn't much control there.