Externalities, Meet Externalities

Michael Lewyn's picture

(NOTE TO READERS: An expanded, footnote-filled version of this article is online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1632935 )


Externalities are costs (or benefits) imposed on third parties by another individual's voluntary action.  Government regulations exist at least partially to protect us from externalities created by others.

But government regulation may create its own externalities, leading to costs that may even outweigh the benefits (or "positive externalities") created by regulation.

One example of externality-creating regulation is government-imposed minimum parking requirements.  For example, Jacksonville, Florida requires apartment complexes to provide 1.75 parking spaces per one-bedroom apartment - despite the fact that 16% of Jacksonville's renter households don't even own one car.  The purpose of such regulation is to prevent externalities- for example, to prevent drivers from creating congestion and pollution while they cruise the streets searching for parking spaces.  

But in fact, this sort of regulation creates a variety of negative externalities.  First, minimum parking requirements, by artificially increasing the supply of parking, reduce the cost of parking and thus force landowners not only to build parking lots, but to give parking to motorists for free (or, in downtown areas, at lower rates than would be the case in the absence of regulation).  But landowners still have to pay to build parking lots and garages; so landowners will pass the costs of parking lot construction on to their tenants and customers in the form of higher rents and prices.  So as a practical matter, society as a whole is forced to subsidize driving; parking regulation makes driving cheaper by making parking free, and makes nondrivers pay more for goods and services to support this subsidy.

Second,  minimum parking requirements reduce the total amount of housing and commerce, because land that is used for parking cannot be used for housing or commerce.  And by reducing the housing supply, minimum parking requirements reducce density- and residents of lower-density areas tend to be highly dependent on automobiles for most daily tasks, because they are less likely to live within walking distance of public transit and other amenities.  So in this respect as well, minimum parking requirements increase driving and its negative side effects.

Third, minimum parking requirements indirectly discourage walking, by encouraging landowners to surround their buildings with parking.  Where shops and offices are surrounded by a sea of parking, they are unpleasant places for pedestrians, because pedestrians must waste time walking through parking lots and risk their lives dodging automobiles.  When walking is unpleasant, people drive more and walk less.

Thus, minimum parking requirements make driving more attractive and walking less so.  It logically follows that municipal parking regulation may actually increase, rather than decreasing, congestion and pollution.  And by increasing the number of parking lots, minimum parking requirements may increase pollution from stormwater runoff.  Rainstorms cause stormwater to fall on parking lots, collect metal, oil and other pollutants lying on the ground, and then to run off into nearby waters, thus making those waters dirtier and more dangerous.

Of course, it could be argued that the costs of minimum parking requirements are slight, because in the absence of such requirements most landowners would build almost as much parking as they do now in order to get financing.  But this argument cuts both ways: if landowners would build parking lots in the absence of regulation, then the abolition of regulation is unlikely to create negative externalities significant enough to justify regulation.

Michael Lewyn is an assistant professor at Touro Law Center in Long Island.



Samuel Staley's picture

Defining externalities

Coincidently I was writing a post for Interchange on the same topic. My column will expand on this concept in more detail (and link to this column), but I think it's important to recognize the difference between undesirable impacts that may result from policy choices and true negative externalities which are costs imposed on third parties without their consent. Low density housing is not necessarily an externality created by minimum parking requirements. It may be a consequence of policy because it accomodates automobile travel, but whether this qualifies it as a negative externality is problematic. Indeed, many (most?) communities in the US make a policy chocie to accomodate parking to support automobile use and they have made policy choices to support low-density housing. In this case, parking and low-density housing is not an externality but reflects collective values expressed through the political process and is a policy outcome. Just because an outcome is undesirable or unanticipated doesn't make it an externality. Sam Staley

Outcomes and their externalities.

Just because an outcome is undesirable or unanticipated doesn't make it an externality. Sam Staley

This is an excellent point. It is certainly true that the argument needs clarification.

A clear relationship should be stated that relates low-density autocentric suburbs, increased VMT, and increased carbon emissions, more SOx/NOx/LL ozone and resultant human cardiopulmonary issues/vegetation damage/and so on.



Irvin Dawid's picture

Parking requirements as externalities?

I think Sam's points are well-taken.
In fact, going by Michael's initial assertion: "Externalities are costs (or benefits) imposed on third parties by another individual’s voluntary action", I'm not sure the effects are externalities - more like the "law of unintended consequences", but clearly they are not voluntary if they are forced by government statute or ordinance.

Call me a neophyte, but I like to stick with my favorite example - tailpipe and smokestack emissions (and all other pipes - like those dumping sewage, pollutants, etc.)

As long as these are not accounted for (which yes, is a little tricky because now they ARE accounted for due to regulations), but more importantly, not charged, then the costs are imposed on all of us.

The best example is also the most current. Excuse the length of this excerpt from an illustrative interview on NPR with a key politician:

"Sen. KERRY: Well, look, everybody here knows we can pass an energy bill. We can do a bill that provides incentives for alternatives and renewables. We can do a bill that has incentives for energy efficiency. We can do all of that. That's easy.

There's only one question before the United States Congress and the country, and that is: Can we get started pricing carbon?

And pricing carbon requires us to go a little further than we've ever gone before. If all we do is another energy bill, we will reduce emissions by 1/10th the level than if we price carbon, and we will create 1/10th the number of jobs."

Irvin Dawid, Palo Alto, CA

Michael Lewyn's picture

Thanks for the comments

Since my SSRN article is just a rough draft, your comments will be helpful in my quest to whip this article into publishable condition.

Other negative effects on businesses

In the context of our current rezoning process in Queens, NY, I made the argument that residential parking requirements hurt certain businesses.

Most of the businesses in Sunnyside and Woodside, Queens, have very limited customer parking, and there is plentiful transit and pedestrian infrastructure. As Lewyn points out, parking minimums encourage car ownership and driving. Residents who try to drive to neighborhood businesses will get frustrated at the limited parking available and drive outside the neighborhood instead. Because of this, businesses in this area have an incentive to support limits on residential parking.

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