Walt Disney’s Celebration: A Success Story of Internalizing Externalities

Introduction
Externalities are costs or benefits that are incurred by parties outside of the transaction for a good or service (Caplan, 2008.) In regards to land use planning, externalities arise from the development of land, and these externalities can be positive or negative. For example of a positive externality is when the use of land in a particular property increases the value of the surrounding properties, or a negative externality arises when the particular property is developed resulting in negative change in value to surrounding properties. There are several ways to internalize externalities: The first is the imposition of Pigovian taxes or subsidies equal in value to the externalities; second, the Coasian solution is to clearly define property rights which results in bargaining bringing about the optimal outcome; and third, which is the focus of this paper, the use of land regulation, namely zoning, to plan land development (Caplan, 2008).
With respect to Pigovian taxes, given that land supply is relatively inelastic, these will have little effect on the mitigation of negative externalities of, for example, urban sprawl (Caplan, 2012). Further, the Coasian solution to deal with land use externalities involves deal-making between parties which, if there are no transaction costs result in the internalization of externalities. In practice, the Coasian solution is at work in tandem with zoning regulation which affects transaction costs (Staley, 1997). Because of the pervasiveness of zoning regulation throughout the United States, the following will examine two different cases of land use regulation, namely, the lack of formal zoning in Houston, Texas and private zoning in the town of Celebration, Florida. It will be shown that the effectiveness land use regulation is dependent on the design of the respective regulations; in other words, zoning is useful if the regulation is well thought-out. In the case of Houston, even though there is an absence of formal zoning laws, the city’s land use regulations have nearly the same effects of restrictive, pro-sprawl, and anti-pedestrian zoning laws. On the other hand, in the case of Celebration, well thought out zoning and land use regulation can result in the minimization of negative externalities. In the end, it is suggested that government planners lack the incentives necessary to create regulations that maximize the benefits to society as a whole, as opposed to private parties who do have the incentives to create well thought out regulations.
City of Houston: No traditional zoning
First, to analyze the effectiveness of land use regulation it is necessary to define criteria for successful regulation or planning. The specific spillover costs identified as negative externalities that will be the focus of this paper include dependence on automobiles, sprawl, and property values. Next, the characteristics of Houston’s regulation will be examined, then the characteristics of Celebration’s regulation, followed by the outcomes of each with respect to dependence on automobiles, sprawl, and property values.
To begin with, Houston is commonly regarded as an example of laissez faire style unregulated development. Houston is commonly referred to as “the only major city in North America without zoning” (Zhu, 2009), and Bernard Siegan (1997) focuses on the differences between Houston and other cities with zoning. On the other hand, Michael Lewyn (2005) rejects the claim that Houston is an example of free market unregulated and unplanned development. Specifically, Lewyn (2005) identifies Houston’s regulations including minimum lot sizes, minimum parking requirements, wide streets, long blocks, enforced separation of uses, and excessive highways.
Regarding the minimum lot sizes, until 1998 the city code required “townhouses to sit on at least 2250 square feet of land” (Lewyn, 2005). This regulation effectively limited the building of townhouses for low and middle income groups. Further, regulation required a minimum lot size of 5000 square feet for detached single family dwellings. This minimum lot size requirement effectively created the low density which forces people to rely on automobiles and increases the cost public transportation. These regulations also contributed to urban sprawl as population growth was forced to further and further from the city’s core. In 1998 the city somewhat relaxed the minimum lot size ordinance requiring only suburban areas to conform to the 5000 square foot minimum and reducing urban lot size to 3500 square feet. However, as Lewyn points out, “only 25% of Houston residents live in the "urban" zone affected by the 1998 ordinance” (Lewyn, 2005), insignificantly affecting urban sprawl.
Further, Houston’s minimum parking requirements are at odds with laissez faire principals. In Houston “virtually every structure built in Houston must, under municipal law, have an ample supply of parking” (Lewyn, 2005). This effectively results in a subsidy, hence an incentive, for drivers making life more difficult for pedestrians as they must walk through parking lots to reach businesses. This policy also results in less density because the opportunity cost for parking space is space that could have been used for housing or business.
Houston also requires major thoroughfares to be at least 100 feet wide, and all other streets 50-60 feet wide (Lewyn, 2005). This is another regulation discouraging pedestrian traffic, which is essentially a negative externality. This also results in increased sprawl as Lewyn notes “A University of Wisconsin study showed that in one Wisconsin county, each ten feet of required street width reduced the county's housing supply by three to four percent.” (Lewyn, 2005). The city also requires major intersections to be at least 600 feet apart (Lewyn, 2005). This ordinance creates another difficulty for pedestrians as it becomes much more dangerous to cross streets and also increasing the distances pedestrians much travel to reach their destinations.
Further, Houston’s enforced separation of uses is remarkably essentially the same as explicit zoning enforced by government. In Houston, lot uses are designated by covenants created by contracts, rather than government officials. However, these covenants are enforced by the city attorney who can sue, for penalties up to $1000 per day if they are violated (Lewyn, 2005). In addition, “In its covenant litigation, the city focuses on enforcement of use restrictions (that is, covenant provisions requiring separation of uses), as opposed to enforcement of other restrictions such as aesthetic rules” (Lewyn, 2005). The result is subsidization of land use segregation, with the result not significantly different than explicit zoning.
Lastly, with state and federal funding support, Houston has built numerous expressways further contributing to sprawl and dependence on automobiles. Houston currently has two beltways and the Houston-Galveston Area Council has proposed to build an additional 10,703 lane-miles of roads. Also, the plans include making the surface streets even wider. These new expressways will encourage the development of new suburbs while making dependency on automobiles even more pronounced and increasing the cost of public transit (Lewyn, 2005).
In summary, Houston does not have explicit zoning regulations, but on the other hand, the government is heavily involved in the regulation of the city’s land usage. The city’s government enforces minimum lot sizes, minimum parking requirements, minimum street width, minimum block sizes, separation of uses, in addition to excessively spending and building unnecessary highways. Rather than internalizing externalities, these regulations and interventions are directly resulting in negative externalities. Each of these impositions contributes to urban sprawl and dependence on automobiles, i.e. two of the criteria mentioned earlier that we are using to measure the spillover. In addition, the factors contributing to sprawl away from the central commercial districts, along with the enforcement of segregated land uses can have a negative impact property values because mixed-use development “allows for greater housing variety and density, reduces distances between housing, workplaces, retail businesses, and other destinations, encourages more compact development, strengthens neighborhood character, and promotes pedestrian and bicycle friendly environments” (American Planning Association, 2012).
All in all, Houston’s reliance on government regulation in regards to land usage is doing little to internalize the externalities of development, and to the contrary seems to be making the negative spillovers worse. Even though, on face value Houston does not explicitly use zoning, the end result is essentially the same as other governments with intrusive and restrictive public zoning regulation.
Town of Celebration: Private zoning
As opposed to government regulation of land use, we look at an example of private land use planning, namely that of Celebration, Florida. The town of Celebration, Florida is a master planned community located in northwest Osceola County, Florida. The defining feature of this community is that it is regulated by private homeowners’ associations, namely the Celebration Residential Owners Association, Celebration Nonresidential Owners Association, and the Celebration Joint Committee. These organizations “regulate property use and provide maintenance and operation for a number of common facilities, including landscaping, parks and playgrounds” (Community Profile, 2011). In fact, in the United States, regulation by homeowner associations dates back as far as the 18th century (Nelson, 2005.) According to Robert Nelson, English association models arrived in the United States by 1831 when the common ownership regime for New York City’s Gramercy Park was shifted to private owners who were named as trustees responsible for the park’s maintenance. This essentially started the trend of private communities being formed by housing developers where future owners’ actions would be regulated through a system of covenants incorporated into the deeds (Nelson, 2005). This trend ultimately resulted in many private communities, one of the largest being Celebration.
Celebration started out in the early 1990s when the Disney established its subsidiary, the Celebration Company in order to develop approximately 4,900 acres of land (Davis, 1997). Development initially started in 1996 and today includes approximately 4,060 homes and condos with about 9,000 residents (Community Profile, 2011). Further, the town possesses many public goods including a town center, lake, schools, a health center, nature trails, parks, office buildings, 18-hole golf course and clubhouse, and a 4-star hotel (Community Profile, 2011). The town is completely master planned and utilizes a mixed use zoning scheme with banks, the post office, town hall, residential, retail, office, and other businesses situated around its lake (Community Profile, 2011). The plan allows for numerous restaurants and other retail businesses, and in the event of spillover effects, for example increased value to the community, the private community can adjust rent to businesses downwards directly, as opposed to more restricted government-run communities (Stringham et al, 2010). This is because proprietary communities have the incentive to solve spillover effects in order to increase profits. The Celebration also includes a full service hospital with a portion of the infrastructure cost borne by the private community. The town’s plan also includes places of worship for religious groups including Presbyterian, Seventh Day Adventist, and Jewish Congregation (Stringham et al, 2010).
Further, externalities from the outward appearance of homes can have effects on surrounding homes and neighborhoods. To deal with this, the planners of Celebration designed the neighborhood homes all with traditional exteriors, complete with front porches. Residents can choose between eight different estate types, along with six different architectural types. Garages access and garbage pickup are in alleyways out of sight as well. The particular attention to detail increased the costs for development, but more importantly they successfully internalized much of the externalities this way as total value of entire neighborhoods increased (Stringham et al, 2010).
There are several public goods that are not privatized in Celebration. These include two public schools, although Celebration Academy is a private school. In addition, the town hosts Stetson University’s Graduate Center which is private as well. Further, law enforcement is provided by the county’s sheriff. There is also public transportation provided by the Lynx bus system run by Central Florida Regional which provides intercity transportation, in addition to the privately run Celebration Trolley which is operates within the town (Stringham et al, 2010). In summary, the public zoning method utilized by the city of Houston lacks the incentives to provide an economically efficient outcome in regards to externalities. Specifically, the policies of Houston encourage low density, urban sprawl, dependency on automobiles, and ceteris paribus lower housing values. On the other hand the private zoning characteristics of the town of Celebration provide the incentives to a more vibrant community that is pedestrian friendly, and adds value to property because of the incentives for Disney to enact polices that benefit residents the most. However, the outcomes are not exactly black and white. Particularly, the city of Houston is able to enact policies to contribute to the internalization of externalities. For example, the city could spend less money on new highways and road widening and instead spend on improving conditions for pedestrians by expanding sidewalks, installing more medians, making streets seem smaller by planting trees, etc. Most importantly they must reduce dependency of automobiles.
Despite the city’s incentive, they have already taken some steps to address this. For one, public opinion “supports policies designed to make Houston less auto-dependent” (Lewyn, 2005). The city acted by reducing minimum lot sizes in certain areas which have resulted in increased housing development inside the city’s loop, hence decrease sprawl. As a result, “the value of urban land rose by seventy percent” (Lewyn, 2005). Also, since the 1990s, the city has shifted its philosophy in planning and development by placing more importance on inner city development (Vojnovic, 2003). This involves more emphasis on mixed-use development through public investment, public private partnerships, and direct subsidization of (re)development projects (Vojnovic, 2003.) Up until the late 1990s inner city development has been on the decline, as stated above culminating in urban sprawl. In 1997, only about 2,000 people resided in the core of the city with an overall population of about 1.8 million. Starting with the first major redevelopment project of converting a hotel into loft apartments, local developers combined with various downtown associations launched successful revitalization projects (Vojnovic, 2003). Contrary to the earlier characterization of Houston’s zoning methods, these projects are a reflection of less governmental involvement and laissez faire policy. So even though Houston has enacted policies contrary to overall maximization of utility, the citizens can slowly bring about change in line with overall interests. In addition, Celebration is not exactly a utopia of urban development. Even though the master planned community is in line with the incentives of the private sector, the primary beneficiary is the company of Disney. In order to internalize externalities, Disney has enacted especially restrictive policies which are at odds with a laissez faire philosophy. For example, Disney relies on a top-down methodology that significantly restricts individual freedom and encourages homogeneity. This may benefit a certain sector of the population, such as middle to upper class white Americans, but is not representative of a diverse population of people observed in the United States overall. Therefore it is apparent that the private master planned communities may not be optimal for diverse big cities with heterogeneous populations (Thomas, 2007). Further, Celebration is a master-planned community developed by a company that specializes in entertainment. As a result, the town has some of the similarities of artificialness of a theme park that is designed to impress and stimulate the visual senses of tourists, but at closer inspection it is revealed there is certain fakeness. For example, in Celebration, U.S.A. Living in Disney’s Brave New Town By Douglas Frantz and Catherine Collins, the authors elaborate on the make-believe atmosphere of Celebration. In their words,
“At times there seemed to be a make-believe quality, artificiality to the whole enterprise. Some houses that appeared to have second-floor dormers were actually only single-story buildings; the donners, complete with windowpanes painted black to simulate a darkened space, were fake, assembled on the ground and hoisted into place by cranes. In the same way, the builders tried to create the illusion of space beneath the porches, like that where many of us as children hid while playing hide-and-seek, by tacking pieces of plastic simulating wooden latticework onto solid foundations. Upon closer inspection, we also saw that the long white fence that marked the entry to the town was plastic and the water tower functioned only in the sense that it bore the words "Disney's Town of Celebration." The studied nostalgia, right down to the picket fences bordering every corner house and the profusion of night-blooming jasmine, disturbed”(Frantz et. al, 1999). Moreover, the overly homogenous makeup consisting of only middle to upper-class residents further reinforces the forced appearance of the town. As opposed to bigger and more diverse cities, Celebration can practically avoid problems that other areas are required to deal with. It seems that poor people and minorities would not be welcome and financially unable to live in Celebration. This poses a sort of selection bias when analyzing the private regulatory method of Celebration. In other words, when looking at the success of a town like Celebration, one can conclude that the success is due to the superior policies brought about by the incentives of private rather than public land use regulation, but in reality, most of the success can be attributed to the absence of certain characteristics, such as demographics, where the town is simply escaping the problems of other cities, rather than fixing the problems themselves (Frantz et al, 1999). Going further on the same criticism, the land area size of Celebration poses the question of the effectiveness of a single interest in a significantly larger population as opposed to a relatively small population of only approximately 10,000. It is uncertain that a completely top-down master planned community can internalize all the externalities of a heterogeneous population. Also, there are fewer opportunities for employment in the small town, so most of the residents work outside of Celebration, thus increasing automobile dependence and not really addressing the issue of urban sprawl, despite mixed use development within the community (Halbur, 2008). A more realistic approach for a big city would be some mixture of public and private zoning to best capture the incentives of the overall population.
Conclusion
In conclusion, in order to internalize externalities arising from property development, some sort of land use regulation is necessary. This paper has analyzed two cases in the United States, namely, the regulation schemes of Houston, Texas, and Celebration, Florida. The city of Houston does not have any explicit zoning laws, but at the same time the public sector is heavily involved in regulating land use. As observed, the policies enacted in Houston have resulted in less than optimal outcomes regarding externalities. Specifically, the city is experiencing a significant amount of urban sprawl, in addition a relatively hostile environment for pedestrians and dependence on automobiles. On the other hand, since the 1990s, the city has been working towards correcting some problems by encouraging mixed use development, and launching both private and public redevelopment projects with the intention of reducing automobile dependence and increasing residence inside the core of the city. The private master-planned community of Celebration is specifically designed to project the ideas of a perfect community by Disney. The private regulatory scheme utilizes mixed use development with businesses and residences in close proximity. In addition, the outward appearances of buildings are heavily regulated to protect the look of the town. The policies seem to work as the town is pedestrian friendly, and land values reflect the internalization of external costs and benefits. However, the town is exceptionally homogenous in terms of demographic composition, and is relatively small. Given these attributes, it is not certain if a completely private zoning scheme is universally applicable, especially to bigger and more diverse population centers.
As a first degree approximation, private zoning is more beneficial to maximizing the benefits of a community as opposed to a publicly regulated community, primarily because of the incentive structure. Namely, public governments do not have all the incentives necessary to maximize the utility of the population at large, and instead, governments reflect personal and special interests. On the other hand, private communities, such as Celebration, FL, on average, do more to internalize externalities and maximize the utility of the overall population because of the different incentive structure. However, comparing and contrasting only two different examples does not completely elucidate the differences between public and private regulation. Even though Houston lacks the incentives for maximizing the benefits of population, the government is still capable of improving conditions as public opinion has a degree of influence in policy formation. Also, the town of Celebration is quite homogenous and it is not certain that the same private structure can be applied to significantly larger heterogeneous population. So, on average, it was found that private zoning is marginally better than public zoning, but with the reservations mentioned above.

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