Government actions affect businesses and decrease or increase the value of people’s property all the time. That is an issue right now as Central Corridor light rail line construction in St. Paul starts to bite University Avenue businesses, at least in the short run. But other businesses and landowners may profit from the new line in the longer run.
Varying effects on land values also are an issue around a proposed new bridge across the St. Croix River and in myriad other instances of zoning or siting of new infrastructure.
It is important to note that similar spillover effects can result from private business decisions. When the BNSF railroad decided to reopen a line though the Cascades that had not been used for several years, adjacent homeowners protested that the return of rail traffic would be disruptive and decrease their property values.
When a private utility company wants to abandon an obsolete dam, as happened at Coon Rapids and Rapidan, Minn., landowners who have enjoyed waterfront property don’t want to see that changed to a mud flat. It would affect their net worth as well as the aesthetics of day-to-day living.
The first public policy issue in all of this is the degree to which government should ameliorate any adverse collateral effects of its activities on affected landowners. A second issue is whether it should intervene when decisions of private parties affect the property values of others.
A student’s question prompts this whole discussion.
During a lesson about how British economist David Ricardo laid out the relationship between the income from an asset and the value of the asset, a perceptive student asked if the effects of any added enjoyment or unpleasantness associated with a nearby activity could be analyzed in the same framework. The answer is yes, and an example she used in her question was timely.
The value of land surrounding the troubled nuclear plants in Japan will decrease to the extent it is contaminated with radiation. The power company may be compelled to pay for those damages. But because the accident has raised concerns about reactor safety worldwide, property values adjacent to many reactors may fall, even where there has been no release of radiation. The risk of possible harm affects the willingness of potential buyers to pay for such property as well as owners’ willingness to sell. The effect is not as great or as certain as where there is an actual release, but it occurs, nevertheless.
Logically, when a highly publicized incident like this occurs, people living near where proposed reactors may be constructed are more apt to do whatever they can to stop the project. We can ridicule this as NIMBYism (not in my back yard), but the landowners are correct in believing they will be harmed financially if a nuclear plant is built near them.
In the same way, much resistance to racial integration of neighborhoods in the 1960s and 1970s was rooted in prejudice. But it also was true that given the deep-seated nature of racial bigotry in our society at that time, the value of one’s house often did go down when an African-American family moved in next door. Thus, there was a prisoner’s dilemma motivating homeowners to bail out of a neighborhood while the bailing was good. This turned property value declines into a self-fulfilling vicious circle.
The Fifth Amendment to the constitution requires that compensation be paid when government takes property for public use. There are many volumes of legal cases over just what constitutes a “taking” that must be compensated. If your land was taken via eminent domain to turn U.S. 12 into Interstate 394, you clearly had a right to compensation. However, if noise volume from the higher traffic levels make your house harder to sell, but it sits a block away, you are out of luck. Life is unfair.
Human sympathy makes us focus on those who are harmed by such construction-related “takings” but ignores the fact that others benefit from government “givings.” The changes on University Avenue may be adverse for some small businesses over the long run. This will reduce the value of these businesses, a direct hit to the net worth of their owners.
However, the fact that the line will make both downtowns accessible to apartment dwellers means the values of potential residential properties along the line already have gone up, just as they did along the Hiawatha line. However, no mechanism (or political or popular support) exists for government to capture any of that increase in private wealth resulting from new government infrastructure.
Economic theory says that if you define property rights clearly, private markets can reach solutions to such problems of externalities without government action. But that is only true with near-perfect information about all costs and benefits and with no “transaction costs” of suing for damages. And politics always will be a factor when government itself is one of the players.
This is an area where both process and outcomes will always be messy and practical considerations usually will trump economic theory. Some people always will be hurt unfairly. And others will receive financial windfalls.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.