Subway Externalities

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Paul Romer says,

If the only way to support Manhattan densities is with the subway system, then you’ve got to figure out how to finance the subway system. And, you know, part of what we’ve learned is that the value of the subway system will show up to a large extent in the value of the land. So that you can’t just think about sending out, giving out a contract for somebody to build the subway system and try to finance it based on the fare revenue. What you’ve got to do is somehow internalize the increases in the value of the land induced by the kind of access that the subway can provide.

This in a Russ Roberts podcast. Russ has had other interesting guests the last few weeks, also.

14 thoughts on “Subway Externalities”

  1. Property tax rates (residential, commercial, both?) that increase with proximity to subway access points?

  2. Nah, if the value of land increases because of its proximity to the subway system, your regular property tax ought to go up proportionally without legislating a tax increase. So the problem is trivial. What gets you into trouble is the notion that “We should build a subway. And nobody’s taxes should be affected!”

    • Consider the difference between an increase in the property tax rate, and an increase in the amount of property tax paid (even with a steady rate).

  4. Nobody seems to raise the point that “if the density of NY requires a subway, that’s a sign that density is too high” and that rather than building a subway steps should be taken to disburse the things (jobs) that drive the density.

  5. Mike Shupp: if we want to fund a local improvement this year that isn’t pays off at *less* than the ratio of COST : (NPV of 1% * DELTA-LAND-VALUE over future), we have to capture greater than 1%/year of the improved value (or 1.5% or whatever it is nowadays). This suggests a limited duration increase in property tax RATE (not just base value) for the areas that benefit, to ensure we don’t forego improvements that could pay for themselves.

  6. Posting the same comment I’d placed at Econtalk.
    —
    Someday, someday the world will awaken to the wisdom of Georgism.

    A land value tax, in combination with flexible zoning, has features that help cities naturally regulate themselves.

  7. I’m not sure raising property prices is a negative or positive externality. People always fight new roads and developments and shopping centers. Are they all fools?

  8. It is called Tax Increment Financing. It is a property tax instrument that is extremely common, especially in cities. Chicago probably has about 1,000 of them (no joke).

  9. Is it possible that the “land value” (prices?) are related to the human use? (Probably).

    For people to be able to use the “land” so as to increase its “value” there may a number of necessary facilities (one being transport; there are others – communications, e.g.). Because the existence and operation of a facility has an effect on the use of “land,” and hence on the “value” of land is not sufficient “logical” reason to require that “value” to be tapped or shared to support either that existence or operation.

    However, it may be sufficient politically to the humans who use both the land and the facilities and don’t come to consensus on how the costs of both uses should be met.

  11. So the subway increases the value of the land, but the people who benefit from this value would not be willing to pay a fare to cover the costs? Prices wouldn’t adjust in response to a higher fare? Doesn’t make the subway sound very valuable to me.

    Perhaps if transit agencies were mandated to cover their costs through fares, the costs wouldn’t be that high. A large chunk of the costs is attributable to paying above-market union wages, much of which is for jobs that aren’t even needed. Taxes, of any kind, exacerbate the problem because it results in little incentive for transit agencies to be efficient.

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