Public Goods and Private Communities

Fred Foldvary

Chapter 3 - Territorial collective goods

Define public goods as collective, non-rival.

They can be excludable or non-excludable.

Human beings live in three-dimensional space.

Productive space is scarce.

The flow of income from the use of space is rent.

The classical Ricardian model show how rent and wages originate.

Collective goods which impact a particular space are territorial.

The presence of these goods makes the space more productive.

Users of territorial public goods are mostly local.

Territorial goods are excludable, even if only by proximity.

They pay rent or purchase land to use the territorial goods.

Users are not free riders, since they pay rent.

Rent arises not just from the use of a good, but from its availability.

Rent reflects the positive and negative territorial externalities.

When taxes pay for the territorial goods, tenant-workers get double billed.

Landowners benefit from the increase in rent and site value, as well as the territorial goods.

Landowners get subsidized.

The rent is a private good.

When the rent is collected by private enterprise, it can finance the territorial goods.

Then residents only pay once, with rent.

Landowners pay a fee or assessment to get the services, so they are not subsidized.

The rent reveals the demand for the public goods.

The optimal amount is where MR = MC.

The distribution of the population among communities reveals the demand among differing territorial goods, and the rent in a community reveals the intensity demand there.

A third way is demand revelation, based on stated values.

A territorial good can impact a large area, such as national defense.

Only those within the country boundaries are defended,

and some illegal immigrants do get expelled.

Most collective goods provided by government are territorial.

Some territorial goods are tied to others, and their payment can come from the other.

A neighborhood park near houses.

A waterfall near a camp.

An elevator in a hotel.

In effect there is an auction market for n sites in a community.

If the n plots are identical, the rent is determined by the bid of the (n+1)th bidder.

The nth bidder sets the price for all the renst, who get a tenants’ surplus.

Where attached capital goods make sites more productive, the gain is not really land rent,

but a rental return to the capital goods.

The rental is a direct quid pro quo, payment in exchange for benefits.

When rent or site value pays for public goods, the payer has knowledge of the cost.

With a complex mix of sales, income, and other taxes, the total tax payment is unknown.

Even with income taxes, the taxpayer may not be aware of the deductions until tax time.

A property tax is more visible, and thus has been the object of more resistance.

This is a tax illusion.

Governments could make monthly deductions from property taxes from accounts.

Why do they not?

Economists who wrote about land taxes.

William Petty (1623-87).

Francoise Quesnay and Physiocrats. Laissez faire with impot unique.

Henry George. 1879, Progress and Poverty. Single tax on land.

Leon Walras. Knut Wicksell.

Harry Gunnison Brown.

Stiglitz, Henry George theorem.

William Vickrey: marginal cost pricing and rent.

Today: Mason Gaffney, Nicolaus Tideman.

Rent can take the form of

admission fees, condominium assessments, property taxes, mortgage interest.

Advantages of rent:

1. No deadweight loss

2. Pays back the generated value

3. Provides macroeconomic stability.

It eliminates the real estate boom and subsequent bust.

Chapter 8 - proprietary communities and community associations

Spencer Heath, pioneer of proprietary governance theory.

Politics versus Proprietorship, 1936, manuscript (IHS, Virginia)

Influenced by Henry George, but applied it to proprietary community,

private community with a single owner.

Heath’s landowner is also an entrepreneur who creates land values.

Proprietary governance replaces predatory taxation with rental payments.

Proprietary communities include apartments, shopping centers and malls, mobile home parks, marinas, office buildings, theaters, ships.

Citadel, Market, and Altar 1957

The hotel as a proprietary community.

Provides security, transit, parks, utilities, administration, paid by the room rental.

The rental is voluntary, contractual. The hotel competes in a market.

The hotel serves as a model for larger proprietary communities.

These can associate among themselves for services of greater scope and area.

The interests of the guests are in accord with the interest of the owners.

Heath’s grandson, Spencer Heath MacCallum. Heath the “popdaddy.”

Anthropoligist, also studied real estate.

Art of Community, 1970

All government functions can be done by proprietary communities.

Property relations can replace taxation and zoning and other regulations.

MacCallum: contemporary society suffers from schizophrenia.

Taxation solves the free rider problem.

But the same agency that provides wanted public services also performs the disservice of cannibalizing the property of the people.

Government is benign on one hand, and a destructive threat on the other.

Like traffic cops.

MacCallum offers a way out: proprietary governance.

It combines governance and markets.

Replace taxation with rentals paid to the proprietor.

MacCallum sees an advantage of proprietary governance relative to associations or zoning.

Zoning is difficult to change by an owner, but subject to change by a city.

The single owner can change the land use.

Associations can find it difficult to change the land use and covenants.

Since residential associations are rather recent, the problem is mostly in the future.

Tax laws favor individual land titles.

Proprietary ownership overcomes conflicts of interest.

MacCallum also wrote a constitution for a hypothetical communty “Orbis” in space.

Residential associations

I see associations as having useful features that offset their disadvantages.

People want to have maximum control over their dwellings.

A residential community association is a territorial club.

Their rules are called CC&Rs: conditions, covenants and restrictions.

Four types of clubs: RAs, condominiums, cooperatives, land trusts.

In a housing co-op, a member has a right to use a unit, and members must be approved.

Condominium: member owns his unit and a share of the common elements.

The percentage interest is also his vote and budget share.

Tenants may serve on committees and the heads can sit in board meetings but not vote.

The residential or homeowners’ association owns the common elements,

and voting can be by owners and tenants.

The financing can be any form.

The choice among communities is stronger with private communities

because they can differentiate more, such as with retirement communities.

There are two levels of choice: constitutional and operational.

Constitutional, the higher level. Like getting married.

Operational decisions then involve compromise and majority voting.

The voluntariness of an association is at the constitutional level.

Community associations differ from governments in having

explicit contracts among legal equals.

The major theorist of community associations was Ebenezer Howard.

Garden Cities of Tomorrow, 1902. Influenced by Henry George.

Public finance from leaseholds of land.

Ground rent paid to trustees, who transfer funds to an elected council.

Thomas Spence 1775 originated the concept.

Howard: city and country must be married: the garden city.

A unity of design.

Some land trust and residential associations follow the idea to a remarkable degree.

Community Associations Institute an organization of residential associations.

Residential associations are now world wide, sometimes as gated communities.

Very strong in South Africa, Russia, and other high-crime areas.

But also growing in Latin America, China, Europe.

RCAs have clustered housing that leaves more open space.

It shows private enterprise success in providing public goods beyond that of government.

RCA members have to pay taxes even when they save government money.

With tax credits, there would be more private communities.

RCAs typically have a reserve fund for repairs and emergencies.

RCAs spend less for services than governments.

Some community associations are walled and gated.

Some critics say that gated communities divide society and isolate the rich.

But they are a response to government failure to provide security,

as well as an attempt to restore local community organization.

Most private communities are not gated.

Chapter 10: As they like it: Arden and land trusts

An experiment in financing a community from land rent.

Arden, Delaware, near Wilmington.

An example of a garden city, with direct democracy.

The land is owned by a non-profit trust.

The buildings are owned by the residents.

They pay land rent for their leaseholds.

The Trust pays the property tax and the expenses of the village.

Arden shows that in practice, it is not difficult to assess the ground rent.

Founded in 1900 by followers of Henry George to put his ideas into practice as a model.

The countryside looked like the Arden Forest woodlands of England in Shakespeare’s play

As You Like It.

The Shakespeare legacy has been retained.

The land value assessors are elected by the residents.

There are no restrictions on architecture.

As a garden city, 43% of the land is open space.

The lease is a 99-year contract, renewable.

There are quarterly town meetings.

Arden also has many clubs, called “gilds.”

The community was so successful that two new ones were started nearby,

Ardentown and Ardencroft.