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VI. Market-Oriented Planning Of Type 4 - Planning To Simulate A Market With No Transaction Costs

This view of market-oriented planning starts from a specific theoretical perspective based on the works of Ronald Coase. The fundamental idea is that if property rights are well-defined, if actors are rational and perfectly informed, and if transactions costs are zero, then there would be no need for public land use planning. See, for example, Laia (1997), Staley and Scarlett (1998), and Klein (1998). If property owners want to change the use of their land, they could just make a contract with all individuals whose property rights are affected. Investment in infrastructure could be made by private investors who would charge anyone who used the infrastructure, and who would also sell options to landowners who in the future might develop their properties and then might want to use the infrastructure. In such an ideal market, the only role of the state is to define and protect property rights.

The question in this literature (Laia 1997, and Staley and Scarlett 1998) is what kind of planning that can be motivated by the unrealism of the assumptions above, primarily that there in reality can be considerable transactions cost. Can we identify the situations where real transactions costs are too high, and where planning might increase efficiency? There are controversies about exactly what kind of local government planning might be motivated from this perspective, but a rather common view in this literature seems to be that the role of this planning would be to do the following:

  1. Protect against "broad" negative external effects. Local external effects could be handled by contracts between the directly affected parties, but such contracts are difficult if many parties are affected. Staley & Scarlett (1998, p. 10) say in this context, "Local planning should move towards a common-law, nuisance-based standard for regulating land development."
  2. Make sure that there are enough collective goods with widespread positive effects, e.g. larger parks that affect the air quality. Local public goods could be handled by market.
  3. Make investments in infrastructure where large scale co-ordination is important, e.g. where there are networks effects (roads, water, sewage, etc).

In these areas the role of the planner is, according to this view of market-oriented planning, to try to simulate what would have happened in the market if there were no transaction costs. The planner should not start from any specific professional or political view of what is a suitable development. To quote Mäntysalo (1999, p. 182) the planner should, "use the public authority to assist the private sector with minimal regulatory intervention," or to quote Allmendinger and Tewdwr-Jones (2000, p.1396), "The emphasis on planning as a more minimal and focused form of regulation…"

We summarise this type of market-oriented planning, which we call the "Coasian Style," in Table 5.

TABLE 5: Market-oriented Planning: Type 4 - Coasian Style

Component The position of the local government
Visions Weak
Legal rights Strong, but for a smaller number of issues
Financial resources Weak

The differences between the Coasian Style and the American Style planning can also be illustrated by the example of the proposed shopping center. Assume that the profits from such a development would be so high that it would have been possible to compensate all the losers, if there were no transaction costs relating to measuring these costs and benefits for all parties, and for negotiating the contracts. Then the project would be allowed under Coasian Style planning. In reality, these transaction costs could be so high that it is not possible to find a proposal, including compensation, that would receive the approval of the majority of the current property owners. The project would then not be carried out under American Style planning.

Another way to describe this difference is that, given certain assumptions, the Coasian Style of market-oriented planning aims at maximizing total property values. See Milgrom & Roberts (1992), Chapter 2,"The Value Maximising Principle." The American Style, on the other hand, aims at maximizing the property values for the majority of the voters.

It is probably very difficult to implement Coasian Style planning, as we should, at least from a Public Choice perspective, expect that local interests dominate local government planning. We could however, at least in theory, imagine that an enlightened central government under the Thatcher Style of planning would only approve proposals that fulfill the conditions of the Coasian Style planning.

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