The world according to GRP — Tuesday, January 08, 2008:
Making infrastructure pay for itself
Michael Goldschlager (ABC Emails, Jan.7) complains of the lack of underground power lines, sewerage, reticulated gas, and cable TV/internet in outer suburbs of Perth.
What all these services have in common is that they are available only in particular locations, so that their economic benefits are manifested in the prices of access to those locations — in other words, land values. Any location-specific service that is worth providing will increase land values by more than the cost of the service.
If a government has a tax system that reclaims a certain fraction of all increases in land values, then any location-specific service whose cost-benefit ratio is equal to or less than that fraction will be self-funding, or better than self-funding, as seen by the government. So the government will indeed provide the service, and the portion of the uplift in land values that is not clawed back in taxation will accrue as a windfall to the land owners. It's a win-win.
Permission to develop a new estate, together with provision of "headworks" connecting the internal infrastructure of the estate to the rest of the system and adding the necessary capacity, causes an uplift in land values in the estate. Using this uplift as a carrot, the government can require the developer, as a condition of development, to provide comprehensive internal infrastructure. A tax on uplifts is still needed to pay for the headworks.
Unfortunately, however, the effect of infrastructure on land values is an unofficial state secret and trade secret. To protect this secret, there is an unwritten rule that infrastructure must never be funded out of the uplifts in land values that it causes, but must be funded by taxpayers at large, including those who get none of the benefit. This rule in turn has permitted the emergence of the dogma that infrastructure must be provided by private corporations which, by their very nature, cannot claw back a significant fraction of the resulting uplifts in land values — and consequently have to be bailed out by the taxpayers.
Hence it is "too expensive" to provide infrastructure in outer suburbs, while taxpayers in those suburbs pay for similar infrastructure that raises property values in inner suburbs.
[Featured in the 56th Carnival of Cities at A DC Birding Blog.]
Copyright © Gavin R. Putland except as otherwise attributed. Posted at The world according to GRP under the title Making infrastructure pay for itself. You may republish this item verbatim on your website or blog provided that you include this notice (with hyperlinks).
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