Exclusionary Zoning

Limits of Traditional Economic Theory

Charles Tiebout, a noted scholar in economic theory, used microeconomic decision-making models to argue that efficiencies normally associated with the actions of competitive firms in a private market can be realized in a market for public goods, such as school services. According to Tiebout, such efficiencies may be realized if jurisdictions substantially restrict access to the goods, or privatize them. In this way, according to Tiebout, municipalities can offer optimal mixes of services and taxes, excluding all those unwilling or unable to pay the price of admission.

Tiebout's thesis has drawn both disciples and antagonists from the mainstream school of law and economics. Although it may have merit in other contexts, the value of Tiebout's thesis appears limited in the context of exclusionary zoning. First, the valid application of the thesis depends on an assumption that consumers are able to choose freely among residential areas. Housing consumers, however, lack the residential mobility required to allow them to choose freely. Further, despite the apparent diversity of suburban location choices, many households cannot find [Page 196]decent affordable housing at all, a plight particularly afflicting lower income households. Second, suburban privatizing behavior has the effect of shifting an unfair share of development costs from established residents to newly arriving housing consumers, artificially inflating housing prices for the newcomers. Third, the thesis assumes that suburbs, empowered to privatize public goods such as school services, will behave in an efficient manner. In fact, suburban municipalities act less like competitive private firms, striving against one another for the tax dollar of the housing consumer, and more like monopolies, restricting supply and artificially increasing the price of housing through the use of exclusionary zoning ordinances. By screening out bidders with “objectionable” social characteristics, suburbs act, perhaps irrationally, to restrict housing demand itself. Unwanted residents are shifted from the excluding to the nonexcluding municipalities, allowing the excluding municipality to take a “free ride” at the expense of other communities in the region.

But is such behavior irrational? Each municipality has an individually rational motive for implementing noncompetitive policies, such as exclusionary zoning: protection of its fiscal base. The dynamics of regional development argue against any suburb taking a different course. Indeed, voluntary altruistic agreements among municipalities to divide responsibility for housing the poor through “fair share” arrangements would be constantly subject to fractionating because the individually rational course of exclusionary zoning would induce each to be the first to renege on the collective agreement. Such hindrances to effective bargaining among decision makers are sometimes called transaction costs.

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