Debate Magazine

"Agglomeration Effects (might) Change the YIMBY Calculus"

Posted on the 18 July 2018 by Markwadsworth @Mark_Wadsworth

A splendid by Devon Zuegel which I wish I'd written myself.
Worth reading in full, but the upshot is this:
There's a distinction within the YIMBY cause that's mostly unspoken, but it's important. Two of the key goals the movement aims to address are (1) to lower housing prices and (2) to unlock economic, cultural, and social potential. These are often described in similar ways and are in many cases complementary, but they are not the same.
On one hand, there's a lot of talk about how building more will decrease prices because of the models of basic supply and demand curves from Econ 101. We'll call this goal the affordability objective: let's make housing affordable in key metro areas, both for residents who are already there and for those who'd like to come.
Another related but different goal is about how much is lost as a result of locking people out of opportunities in the most productive regions. We'll call this the opportunity objective: let's make it possible for people to to participate in the economic and cultural dynamism in places that they're locked out of right now...

So far, so good. Here's what most YIMBYs resolutely fail to take into account (and refuse to do so, if challenged):
The issue with the conventional supply-demand model is that it assumes that supply and demand are functions of price and price only. At a first approximation, and maybe at the margins, this is basically true. However, it does not account for the fact that the population is also a critical factor in determining the shape of the demand curve for a particular place... the value of living in a particular place is greatly determined by how many people live around it. As the number of people living in a place increases, so does the value of being there. This is often labeled the "agglomeration effect".
She concludes that additional supply probably depresses prices by more than the agglomeration effects push them up, while admitting she has little hard info to support this.
This is clearly not true, we know for a fact that the largest and best connected cities in any country or region always have the highest prices in that country or region (assuming no rent controls or similar measures). But hey, at least she has broken down the issue into manageable chunks and explained what the YIMBYs are missing.
The analysis I would disagree with is this:
A lot of laws exist to effectively cut out the bottom part of the market. (The mechanism here is similar to the argument for how the minimum wage is in fact bad for the very low-wage workers it aims to protect.) Laws like minimum lot sizes, setbacks, amenity provision, max numbers of occupants, etc effectively make it illegal to build affordable housing.
I wish it were as simple as that, but it clearly isn't.
Imposing large lot sizes is by and large a waste of space etc, but this reduces agglomeration benefits, so cancels out. Remember - while allowing higher densities and smaller homes reduces the amount which people have to pay for entry-level bricks and mortar, it means more people and more efficiency, and more people and more efficiency means more agglomeration benefits, and that means higher total prices (the savings on the bricks and mortar cost are outweighed by the higher location rent). Think Manhattan vs Houston.


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