"Wealthy San Francisco residents lose private street over tax bill"

Here's the background for many an interesting thought experiment, from the BBC:

Residents of a San Francisco private street where homes sell for millions of dollars have had the street itself bought from under them.

Presidio Terrace is now owned by two investors, Tina Lam and Michael Cheng, who snapped up the private road for about $90,000 (£69,039, €76,203).

The street - parking, pathways and all - was sold by the city over a $14-a-year tax which went unpaid for decades. Wealthy residents say they knew nothing about the sale until it was done.

(Clearly, in administrative terms, this was pretty appalling behaviour by the "city". If nothing else they should have first identified and contacted the beneficial owners of the street - the 'homeowners association', who are not exactly difficult to track down - and if they failed to pay the tax arrears, then as a quid pro quo, at least pay them the $90,000 proceeds less $944 outstanding tax, but hey.)

We are where we are.

The result is that residents no longer own the road, pavements, trees, or any of the common land - and might have to pay its new owners for parking.

The terrace, an oval-shaped private compound, is seen as one of the expensive city's most prestigious addresses.

Let's assume that the new owners own the street absolutely and can do what they like with it. The street itself is not of interest, it is the ransom value that matters.

Forget charging for on-street parking (the plots are big enough for plenty of off-street parking), the new owners can go the whole hog and do some text-book rent-seeking by setting up a toll booth at the entrance to the cul de sac.

The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. 

There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free.

If the average rental value of a house there is $300,000 a year, the average house has three occupants and the average occupant needs to access the outside world one hundred times a year, that means each time they pass they toll booth, they would be prepared to pay up to something like $500 ($300,000 a year). This reduces the net rent that the owner of an individual home can charge to more or less $zero.

In other words, in a Faux Libertarian free market, with thirty homes on the street the potential ransom value of the street is $9 million dollars a year, capitalised at 3% that's $300 million.

If the current residents refuse to pay up and abandon their homes, so what? There will only be on bidder for the vacant homes, so Ms Lam and Mr Cheng now own thirty lovely homes. They can parcel them up with the street and sell them for $300 million again.

(This is all something that Land-Value-Tax Man would sort out in his afternoon off, but it's nice watching one gang of 'property investors' being pitched against another).