The Public Finance of Private Communities

and Private Transit

Fred E. FoldvaryDept. of Economics

Santa Clara Universityffoldvary@scu.edu

We can recover from “smart” growth with private communities.Entrepreneurs seek to maximize land rent, which optimizes the land use.

General Principles

• Optimal price = marginal cost.

• Civic works create site rentals.

• Marginal benefits decline.

• Optimal quantity: MC = MB.

Spencer Heath, 1957, Citadel, Market and Altar * Hotel services: like a city, but voluntary.* Hotels compete.* Services paid from the room rentals.

Spencer Heath MacCallum

The Art of Community, 1970

Society suffers from schizophrenia. The same agency that performs public services also performs disservices, cannibalizing society with taxation.

William Vickrey

• Price services e.g. transit at marginal cost, including congestion costs.

• Build if rent generated is greater than cost, when users pay MC, often free.

• Rent pays the remaining costs.

Fred Foldvary, 1994

• Public Goods and Private Communities

• There is market success providing public goods, in theory and in practice.

• Demand is revealed by rent.

• No free riders: users pay rent.

• Condominiums, residential associations.

Replace zoning and regulations

• Covenants and easements.

• Association deeds and bylaws.

• Proprietary governance.

• Allow secession and tax substitution.

Private streets and transit

• Cars pay congestion, pollution charges.

• Jitneys, vans, have curb rights.

• Public transit charging MC if generates rent, quantity at MC = MB.

• Streets owned by civic associations.

• No proxie taxes, e.g. on gasoline.

Replace taxes

• Voluntary user fees, with electronic tolls and meters.

• Community assessments.

• Congestion and pollution charges.

• Private and voluntary services.

Mass democracy fails

• Rent seeking by special interests.

• Tyranny of the median voter.

• There is no “general will.”

• Rational voter ignorance: not worth knowing better.

• Candidates must have the money.

Small-group voting

• Little need for campaign money.

• Can personally meet and know candidates.

• Bottom-up power and money.

• Complements private communities.

Conclusion

• Replace dysfunctional mass democracy with bottom-up small-group voting.

• Replace zoning with covenants.

• Replace taxes with fees, assessments.

• Privatize transit, streets, roads.