http://d.repec.org/n?u=RePEc:cpb:discus:178&r=ure
This paper models external benefits of the transformation of an inner city industrial site into a residential area in an urban general equilibrium framework.
Does brownfield redevelopment warrant government support? We model external benefits of the transformation of an inner city industrial site into a residential area in an urban general equilibrium framework, focusing on the removal of a local nuisance, the exploitation of agglomeration economies and preservation of open space at the urban fringe. These benefits are compared to the value of transformed land, which accrues to the developer. A numerical application indicates that local nuisance and agglomeration effects may push social returns significantly beyond these private returns. However, depending on the price elasticity of local housing demand, the amount of preserved greenfield land may be small and it only generates additional benefits to the extent that direct land use policies fail to internalize its value as open space.
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Results
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The number of additional households in the city equals 4814 in the baseline project and internal benefits amount to almost 17 million euros annually, corresponding to a present value of 330 million euros at a discount rate of 5%. The external benefit of removing a nuisance to surrounding residents, based on the estimates from De Vor and De Groot (2010), constitutes 10% of these internal benefits and external agglomeration benefits are worth another 15%. Hence, total benefits are substantially larger than what an owner of the site would consider in her investment decision. The benefit to new consumers is negligible compared to the internal benefits, yet there is a substantial transfer from landowners to consumers who lived in the city already prior to the project.
The internal benefits, the agglomeration benefits and the transfer rise more or less proportionally with the size of the redeveloped site. However, the relative importance of removing the nuisance declines. The reason is that this effect is only external to the extent that it crosses the boundary of the industrial site, whereas within this boundary it is fully internalised in land rents. For a larger (circular) site, the area within is larger compared to the area at the fringe, so the owner will take a larger share of the nuisance into account.
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The less elastic demand, the lower the direct benefits, but roughly half of this loss is offset by a rise in inframarginal surplus. The transfer falls with demand elasticity. In the case of infinitely elastic demand, in which tastes for living in the city do not vary across households, inframarginal surplus and transfer are absent. Agglomeration benefits rise slightly with demand elasticity and the nuisance effect does not depend on it at all.
Agglomeration benefits rise proportionally with the scale elasticity and [there is] ... a minor positive impact on internal benefits.
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With a demand elasticity of -2, redevelopment of a brownfield site of about 100 hectares preserves an area of open space at the urban fringe of about 50 hectares. The resulting benefit is negligible if its value is fully internalized through land use policy at the urban fringe. If the value of open space is twice as high as the development tax ..., then the additional benefit rises to about 15% of the internal benefits. The amount of open space that is preserved and the benefit this generates fall with demand elasticity. In the limiting case of infinitely elastic demand, the redevelopment project does not reduce development at the urban fringe at all.
The presence of agglomeration externalities renders development at the urban fringe more attractive, which is partly reflected in the price of land at newly developed sites. Hence, with a demand elasticity of -2 and a scale elasticity of 0.02, redevelopment of the same brownfield site of about 100 hectares now preserves an area of open space of only about 30 hectares. If demand is sufficiently elastic, then the project may even increase development at the urban fringe – about 120 hectares in the case of an infinite elasticity. This yields additional costs rather than benefits if planning policies at the fringe are not capable of internalizing the value of open space....Agglomeration benefits are also affected by adjustment of the urban fringe. Preservation of open space means that fewer households enter the city so that the rise in productivity is lower than in a scenario in which it is held exogenous. In contrast, the extension of the urban fringe that occurs if demand is sufficiently elastic leads to higher agglomeration benefits. Hence, it may even be desirable to impose a development tax below the value of open space, since its loss is compensated by a productivity gain.
by Niels Vermeer 1 and Wouter Vermeulen 1 and 2
1. CPB Netherlands Bureau for Economic Policy Analysis
2. VU University, Spatial Economics Research Centre (SERC)
CPB Netherlands Bureau for Economic Policy Analysis www.cpb.nlvia REPEC Research Papers in Economics www.REPEC.org
Discussion Paper Number 178; May, 2011
Keywords: brownfield redevelopment, land use externalities, urban general equilibrium, cost-benefit analysis
This paper models external benefits of the transformation of an inner city industrial site into a residential area in an urban general equilibrium framework.
Does brownfield redevelopment warrant government support? We model external benefits of the transformation of an inner city industrial site into a residential area in an urban general equilibrium framework, focusing on the removal of a local nuisance, the exploitation of agglomeration economies and preservation of open space at the urban fringe. These benefits are compared to the value of transformed land, which accrues to the developer. A numerical application indicates that local nuisance and agglomeration effects may push social returns significantly beyond these private returns. However, depending on the price elasticity of local housing demand, the amount of preserved greenfield land may be small and it only generates additional benefits to the extent that direct land use policies fail to internalize its value as open space.
...
Results
...
The number of additional households in the city equals 4814 in the baseline project and internal benefits amount to almost 17 million euros annually, corresponding to a present value of 330 million euros at a discount rate of 5%. The external benefit of removing a nuisance to surrounding residents, based on the estimates from De Vor and De Groot (2010), constitutes 10% of these internal benefits and external agglomeration benefits are worth another 15%. Hence, total benefits are substantially larger than what an owner of the site would consider in her investment decision. The benefit to new consumers is negligible compared to the internal benefits, yet there is a substantial transfer from landowners to consumers who lived in the city already prior to the project.
The internal benefits, the agglomeration benefits and the transfer rise more or less proportionally with the size of the redeveloped site. However, the relative importance of removing the nuisance declines. The reason is that this effect is only external to the extent that it crosses the boundary of the industrial site, whereas within this boundary it is fully internalised in land rents. For a larger (circular) site, the area within is larger compared to the area at the fringe, so the owner will take a larger share of the nuisance into account.
...
The less elastic demand, the lower the direct benefits, but roughly half of this loss is offset by a rise in inframarginal surplus. The transfer falls with demand elasticity. In the case of infinitely elastic demand, in which tastes for living in the city do not vary across households, inframarginal surplus and transfer are absent. Agglomeration benefits rise slightly with demand elasticity and the nuisance effect does not depend on it at all.
Agglomeration benefits rise proportionally with the scale elasticity and [there is] ... a minor positive impact on internal benefits.
...
With a demand elasticity of -2, redevelopment of a brownfield site of about 100 hectares preserves an area of open space at the urban fringe of about 50 hectares. The resulting benefit is negligible if its value is fully internalized through land use policy at the urban fringe. If the value of open space is twice as high as the development tax ..., then the additional benefit rises to about 15% of the internal benefits. The amount of open space that is preserved and the benefit this generates fall with demand elasticity. In the limiting case of infinitely elastic demand, the redevelopment project does not reduce development at the urban fringe at all.
The presence of agglomeration externalities renders development at the urban fringe more attractive, which is partly reflected in the price of land at newly developed sites. Hence, with a demand elasticity of -2 and a scale elasticity of 0.02, redevelopment of the same brownfield site of about 100 hectares now preserves an area of open space of only about 30 hectares. If demand is sufficiently elastic, then the project may even increase development at the urban fringe – about 120 hectares in the case of an infinite elasticity. This yields additional costs rather than benefits if planning policies at the fringe are not capable of internalizing the value of open space....Agglomeration benefits are also affected by adjustment of the urban fringe. Preservation of open space means that fewer households enter the city so that the rise in productivity is lower than in a scenario in which it is held exogenous. In contrast, the extension of the urban fringe that occurs if demand is sufficiently elastic leads to higher agglomeration benefits. Hence, it may even be desirable to impose a development tax below the value of open space, since its loss is compensated by a productivity gain.
by Niels Vermeer 1 and Wouter Vermeulen 1 and 2
1. CPB Netherlands Bureau for Economic Policy Analysis
2. VU University, Spatial Economics Research Centre (SERC)
CPB Netherlands Bureau for Economic Policy Analysis www.cpb.nlvia REPEC Research Papers in Economics www.REPEC.org
Discussion Paper Number 178; May, 2011
Keywords: brownfield redevelopment, land use externalities, urban general equilibrium, cost-benefit analysis
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