Raising infrastructure charges on land development: Incidence and adjustments

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Abstract
The development of land for housing requires investment in new infrastructure. While connection costs are generally paid by developers, the costs of upgrading the capacity of the system fall on existing consumers. In the context of the privatisation of the water authorities, there are proposals to raise the level of charges made for infrastructure provision. This paper examines the likely incidence of such charges and the possible adjustment which may be made by developers. A basic model suggests the cost would be borne by landowners, however there are various circumstances in which this would not necessarily be the case. Developers may pass on the cost in the form of higher house prices, especially in the short run. They will be in the strongest position in areas of rapid growth where they hold large land banks and where there are few alternative sites available for development. Failing this they may be forced to accept lower profits. Raising infrastructure charges can be expected to have some other effects. In the short run there could be some acceleration in development, followed by a slow down after it. Beyond this the optimal time for development would not be changed. There would be some, problably minor, incentive for houses to be built at a lower density. If an equal charge was not levied over the whole country, there would be an incentive for new development to switch into areas with lower charges.

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