Knock-out blow

19th August, 2006

The Undercover Economist – FT Magazine

The view from my upstairs window in Hackney has changed a little now that the beautiful old neighbourhood church has been flattened. The church disappeared almost overnight despite attempts to preserve it – or, more accurately, because of attempts to preserve it. No surprise to an economist, but what’s going on?

The story is simple. Hackney Council was discussing the possibility of extending a conservation area to include the church. Once that happened, it would be difficult to get permission to demolish the church and build something else. The developers weren’t stupid, and knocked the old building down while they still could.

In the US, the Endangered Species Act of 1973 gives broad powers to federal agencies to restrict development in order to protect species. This can produce the same perverse incentives as Hackney’s conservation area. Economists Dean Lueck and Jeffrey Michael studied what happened when the rare red-cockaded woodpecker was discovered in commercially valuable forests in North Carolina. Forest owners who were unwilling landlords to the woodpecker were, of course, not allowed to cut timber. But woodpeckers tend to move about, so there are no prizes for guessing that the forest near the woodpecker, but outside the restricted zone, was cleared immediately.

Michael Margolis, Daniel Osgood and John List found a similar situation in Arizona regarding rare pygmy owls. In 1997, developers discovered that large tracts of land near Tucson were about to be designated “critical habitat”, which would mean restrictions on development. Naturally, the developers didn’t wait.

In many cases, “pre-emptive development” is relatively harmless. Land is developed sooner than it might be, and the environmental regulations don’t do what they were supposed to, but that’s the end of it. However, sometimes the development would never have happened. The church in Hackney might have stood for another hundred years; the North Carolina forests might have been thinned or even left standing forever. If the development was worthwhile, it would already have happened.

Without regulations, the church’s owner would not have leapt to demolish it. Depending on various imponderables, it might have been more attractive to use the church for fancy apartment conversions, rather than raze it and throw up a cheap new building. It was probably worth waiting to see how the local market developed.

Leaving the church standing preserved what economists would call a “real option”, analogous to a “stock option” in the financial markets. The proposal to extend the conservation area destroyed the real option, and with it the church. It was simply too risky to wait and see. Faced with “now or later”, the developer chose “now”. Given time, “later” might have become “never”.

One solution is to introduce temporary restrictions without notice and then start a process of consultation as to whether they should be made permanent. That is far too draconian for my tastes, especially since “temporary” regulations usually aren’t.

A better idea is for governments to preserve land or buildings not by regulating but by buying it. That sounds expensive, but in fact simply transfers the expense from the property owner to the government that wishes to take away his property rights. It might persuade government to be a little more selective with its regulations – before deciding whether to preserve old churches or rare woodpeckers, we should be willing to pay the going rate to do so.

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