Fun Online Poll Results: Agglomeration

Thanks to everybody who voted. The response to the question "Who is best placed to decide what to build on any particular plot of land?" was as follows:

The owner of that plot - 65%
The owners of neighbouring plots - 18%
The local council - 10%
Central government - 7%

Which must be the 'correct' answer. I agree there is superficially a tension between the relative interests of the owners of neighbouring plots if we just look at one particular development, which might deprive the property next door of some sunlight or a view*; but it's more interesting to look at the bigger picture, and ask"Where are land values higher - in the middle of town centres (e.g. Manhattan) or out in the countryside?"; then to ask "How high would land values be on Manhattan if the original settlors had not made use of its natural harbours and defences, and instead zoned it as agricultural land, or restricted planning to one family home per acre?"; and finally to ask "Is Manhattan so densely developed because land values are so high, or are land values so high because it is so densely developed?".

This is what we call agglomeration - even in the absence of any planning restrictions or zoning laws whatsoever, 'birds of a feather flock together'. You'd be daft to build a factory on expensive residential land and you'd be daft to build a family home in the middle of an industrial area; an out-of-town retail park will fare much better if there are several different stores, all selling bulkier things like white goods or furniture but sharing a massive car park rather than just one store with its own car park.

You will also notice that in smaller towns, you get a variety of shops and businesses in the middle of town (you wouldn't go there if you could only buy fruit and veg; you are more likely to go there if you can also pop into the butcher, the baker and the candlestick maker), but in larger towns, you find whole streets or areas where nearly all the shops sell the same thing. In central London, you find clothes shops and department stores on Oxford Street; electronics shops on Tottenham Court Road; theatres on and near Shaftsbury Avenue etc. Interestingly, even though each of these uses must have some 'external costs', it must also have 'external benefits', and the rental value of each shop reflects the profit value to the owner/occupier, plus the external benefits and minus the external costs of the neighbouring businesses.

As the rental value appears to increase if you are in the same street as your competitors (or complementary businesses, in the case of smaller towns) rather than decrease; and as the rental values of premises in the same street are going to be broadly the same, the external benefits generated by each occupant must exceed the external costs (or else rental values would tend to nil rather than skywards).

So the 'location value' of any site, being a positive figure, consists to a large extent (I can't quantify this as a fraction of the total rental value, but it it very significant) of the external benefits created by neighbouring occupants

* So all things being equal, the best thing that can happen is that neighbouring land is developed to its optimum use. I know that a couple of regular commenters (Dearieme and Lola) aren't too happy with the thought of new housing blocking the view over somebody else's land that they currently enjoy, but taking society as a whole, their loss is somebody else's gain; if new housing were built (but not 'social' housing, obviously), then instead of one house with a nice view, there's a new house with a nice view and an old house with not such a nice view. Overall, society or the economy is better off. And if they don't want neighbouring land to be developed, the free market solution is not planning restrictions but the farmer offering to sell them the land for the same price that a property developer would offer.
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For a bit of light relief, this week's Poll will establish how many visitors are 'down with the kids'.