Undercover Economist

Fried chicken versus fresh air

Family Harford is now safely installed in one of the grimmest parts of Hackney. Just outside the back door is a “massage parlour”, a kebab shop, a jerk chicken joint and a betting shop, not to mention flowers for the young man who was recently shot dead outside a local nightclub. At the front is a row of abandoned cars, courtesy of the garage just across the road and the other one just round the corner. Delis are there none.

Cities are agglomerations of bright lights and skyscrapers, but also of sharp elbows and grime. Technically speaking, they are collections of “externalities”. An externality is a cost or a benefit that affects bystanders. Aficionados of economics lectures will recall the quintessential example of the pollution from a factory that damages the business of the fish farm downstream.

My simple humble neighbourhood shows that externalities come in all shapes and sizes. I asked the estate agent Anne Currell to tell me what would really bring down the value of my house. She sounded like she was reading from my neighbourhood yellow pages: pubs with late licences; takeaway food; garages; tyre shops; massage parlours; and betting shops. She didn’t mention crack dens, but I think they’re not good for property values either.

House prices are great measures of these externalities because the house price is a summary of everything potential buyers think is likely to make them happy or miserable. That judgment is, as many of us know from experience, a complicated one. Currell told me of one case where a beautiful Islington house lost several possible buyers when it became clear that the pub two doors down might gain a late licence. A similar home three doors down seemed to be unaffected, so local were the effects. The loss to the nearer seller might have been about 5 per cent or so – for a £1m house, that’s about £50 a week forever. Meanwhile people in the next street paid more, not less, for convenient access to a pub.

Economists have proposed two solutions to the problem of externalities. The first is a tax to discourage the unpleasantness. The idea behind a tax, rather than a prohibition, is that if the fried chicken shop can stay in business despite having to pay an additional tax, its customers clearly value fried chicken more than I value fat-free air in my back bedroom. The second solution is negotiation. I could pay the garage to move the cars, or the “massage parlour” to become a real massage centre. The buyer of the Islington house could have offered the pub landlord £50 a week to close at 11pm. The landlord would accept if the benefits to him of late opening were modest, and rightly reject the offer as nimbyism if the benefits were large. Private deals would lead to the greatest good for the greatest number.

Neither of these solutions seems to work well. Taxation is too clumsy, especially when wielded by unresponsive local governments. Bargaining is fine in the textbooks but unappealing in reality. No wonder city life grinds you down.

The surprise is that externalities in cities are on balance positive – people-watching, being close to friends, enjoying the buzz of a lively culture. We know this because city wages have not kept pace with city prices: do the same job in the countryside and you will be able to buy more stuff even with a lower wage. If cities truly were such miserable places, we should all have moved out by now. It turns out that people flock to London not to seek their fortune but to enjoy the things that money cannot buy.