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Postage Stamp Pricing

Mason Gaffney: Economics in Support of Environmentalism

Sprawl is not the product of free choice
A favorite fallacy is that sprawl results from free individual choice. In fact, sprawl results mainly from subsidies to sprawl, enforced through taxation and/or utility rate regulation. Thus it is imposed, not freely chosen. The classic case, which exemplifies the whole genus, is postal service. It costs you 29¢ to send a letter across the street downtown, or from rural Idaho to rural Florida. The generic name for such subsidies to sprawl is "postage-stamp pricing" (a species of spatial cross-subsidy), which gives you the idea.

In British Columbia, people move around a good deal by car-ferry, because of the terrain. The Provincial Government ("The Crown Provincial") runs the system. There are many lovely little islands in the Straits of Georgia, between Vancouver Island and the mainland, favored by the wealthy, the exclusive and reclusive. Being more sybaritic than Henry D. Thoreau, and politically puissant, they have demanded and received car-ferry service. This service costs about $10 for every $1 in revenue. The resulting deficit is covered by raising rates on the main plebeian line, Victoria-Vancouver. Naturally, these cheap ferries attract new visitors to the islands, and new demand for land there.  ... read the whole article

Mason Gaffney: How to Revive a Dying City

"French Equity" (Equity in Kind)

Under the Code Napoleon, a French testator must divide real estate equally among all children. Money cannot substitute for land; the Code requires equity in kind. The resulting fine subdivision is called morcellement, and the Code demands it without regard for efficiency.

Each heir, in fact, must get an equal share of land of each quality: meadow, woodland, etc.

Today we approach French Equity indirectly, and expensively. We distribute land haphazardly, but seek to make every parcel equally good by extending utilities and roads to all parcels on the same terms, regardless of cost or location.

Economists call such schemes "postage stamp pricing," because postal rates do not vary with delivery costs. Manhattan has 64,000 residents per square mile; Montana has 5.4. It costs a lot more to collect or deliver mail in Montana. The reason postal rates rise is that the U.S. urban population is spreading out more like Montana and less like Manhattan (which once had over 100,000 per square mile). Here are five other examples:

  • The British Columbia Ferry Service. This socialized system has two urban lines that make money, but the whole system hardly breaks even, because lesser lines serve remote areas. The worst costs $12 for every dollar of revenue.
  • British Columbia Hydro. This socialized power system charges uniform rates throughout the Province. Users living in high-density Vancouver are cheap to serve. A few live on the Yukon border, where (I surmise) it costs hundreds of dollars to earn a dollar of revenue.
  • Water and sewer service in Milwaukee County, Wisconsin. City investments have been captured, controlled, and milked by suburban land development interests, helped by state legislators.
  • State university campuses. The legislative ethic demands a prize, such as a university campus, in every electoral district. Most of the eight UC campuses have excess land; some have excess floor space. Sacramento solves rising enrollment not with more intensive use of existing campuses, but with the costly creation of new ones, each to enrich influential land speculators.
  • Water supply in California. The high real cost of serving new settlements is passed on to older settled areas through an accounting device called "melding," stirring all the accounts in the same pot. Melding passes through several levels: a state wholesaler serves the metropolitan district, which serves local districts, which serve cities. At the end of the line, in Riverside, it costs society $1800 to serve the marginal acre-foot (a unit of water) selling for $20. This subsidy is worth fortunes to developers; the cost is spread so others won't notice.

Problems with French Equity

There are two problems with these subsidies as an approach to equity: they are not equitable, and they are wasteful.

  • Equity achieved by regional cross-subsidy is not interpersonal, but interregional. It is like U.S. "foreign aid" programs, which tax the poor in rich countries to aid the rich in poor countries. Some who hold speculative land and enjoy subsidies are among the world's richest people and cor-porations. Equity is not served by milking middle-class neighborhoods to further enrich wealthy owners. "Public works for private gain" is bad enough, but worse when profiteers are already rich.
  • How about waste? Subsidy creates waste in the amount of the subsidy, almost by definition. The New York Regional Plan Association estimates the social cost of creating a new lot on the urban fringe at four times the lot's price (probably an underestimate). Why develop a lot worth only one quarter of its cost? Because other people pay the other three quarters. This process transfers ground rent from areas of overcharge to areas of undercharge, but it destroys much of the ground rent. To spread the surplus, we lose much of it.

Has French Equity any merit? It passed for a way to create jobs when Keynes actually urged waste as a route to full employment. Those ideas are now dormant, but we still do not understand the problem. If we had to fire teachers or policemen each time a city extended utilities to a campaign donor's raw acres, we would better sense the true cost of public works for private profit. ... read the whole article

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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper