A Theory of Development Controls in a "Small" City

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Abstract
This paper analyzes the implications of an institutional structure in which current residents of an urban area have the power to exercise control over the level and pattern of new residential development. We develop a general equilibrium spatial model of a "small" urban area in which the current residents can control new residential development through a zoning policy determined by majority vote. The ability of the residents to control the size of the market is not, in itself, a source of market failure. First best optimality will always require restrictive zoning. Any distortion from first best optimality is the result of the inefficiency of the tax system, not exercised market power. We show that deviations from first best optimality may require leapfrog development, thus providing a possible explanation for this common urban phenomenon.
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