Zoning and Market Externalities

The centennial of the 1916 New York City Ordinance and creation of zoning in the United States provides an exceptional opportunity to reconsider the regulatory and legal basis upon which the key governmental power of zoning is founded. The motive to control the various market externalities embedded in land use regulation, from effects on commercial activity to housing prices and job-related housing needs, has practically guided local governments from the very first days of zoning. Yet, at the same time, such considerations of market externalities remain in the shadows of explicit zoning law and policy, as the discussion is re-routed to the allegedly more stable foundations of zoning, such as control of environmental, fiscal, or social externalities. This Article is the first to specifically explore the legitimacy of local governments regulating private economic activities that have an aggregate effect on the real estate market—defined here as “market externalities.” May a local government limit the scope of new commercial uses, such as shopping malls, if it believes that there is already an excess supply of them; or constrain the entry of big-box retailers to preserve the economic viability of existing retailers in a downtown business district? Can a land use ordinance limit, or entirely prohibit, the renting out of housing units in a certain neighborhood, to keep out investors who might drive up real estate prices? Is government entitled to require a developer of market-rate properties to pay a mitigation fee to finance affordable housing units—under a theory that the project would generate new demand for local services provided by modest-income workers who are in need of housing solutions?This Article develops an innovative theory of zoning and market externalities. It argues that zoning power should extend to regulate market externalities—provided that such decisions are based on a general land use policy that can be clearly identified and are not tailored to intentionally block, or legitimize, specific projects