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?