The Coase Theorem, Land Use Entitlements, and Rational Government

This essay constitutes chapter 6 of my forthcoming book, Zoning Rules! The Economics of Land Use Regulation, which the Lincoln Institute of Land Policy will publish in 2015. This chapter offers a formal structure with which to analyze land use controversies and an evaluation of its relevance. The first part introduces the Coase theorem and applies it to a famous dispute between feuding hotel owners in Miami Beach, Florida. A modification of elementary supply and demand curves, “the entitlements diagram,” is developed in this highly localized context and deployed to illustrate the Coasian approach. I then expand the analysis to include local public goods in a less famous but more practical example involving a rezoning by a successful developer in Lebanon, New Hampshire. The expansion of the entitlements analysis to include local government decisions requires a model of governance that relies on someone called the “median voter,” who is usually in the majority of local elections. The median voter model is the workhorse of local public economics, but it is nonetheless controversial in the legal academy. Many believe that the preferences of the majority do not actually prevail and, when the majority does rule, it is unlikely to respond rationally to economic incentives. I review the econometric evidence that confirms that the median voter's preferences determine government policies and that those policies rationally advance the interests of the majority. The evidence is more controversial in the case of compensation for regulatory takings. It is explored using the experience from a voter initiative in Oregon in 2003, which called for compensation for land use regulation but resulted almost invariably in deregulation. Despite this special example, I conclude from other examples that local governments and the zoning laws they enact are generally no less economically rational than their purely private cousins, modern American business corporations