Wednesday, January 18, 2012


In teaching, I often use the following from the March 1, 1997, issue of The Economist:
In many economics textbooks, the presence of externalities is invoked as a justification for government intervention in the marketplace. Yet the private sector often finds its own solutions to externality problems. This is the secret of the shopping mall’s success. Because a property developer owns the entire shopping complex, its profits depend on the entire mall, not on any particular shop. By choosing the right mix of tenants and charging rents that reflect each store’s contribution to the mall’s overall revenues – including the business it brings to other stores – the developer can ‘internalize’ the externality and maximize its profits.
This is a refreshing antidote to the many discussions that evoke negative externalities ("market failures")  everywhere -- and which sees these as marching orders to "do something."

I have blogged about Paul Romer's Charter City idea.  He may yet find a way to get the green light to start a brand new charter city in Honduras, or in parts unknown.  What if he does?  What happens next?  Doe he enlist an architect or planner with a "vision" -- as described in Spiro Kostoff's The City Shaped?

Or does the cited passage suggest that scaling is not a problem and the new city can be sold in sections that intrigue developers so that they can take it (plan) from there?

There is a size distribution of firms in every industry.  That size distribution is endogenous -- and it changes all the time.  Developing and planning the new city is a problem much too big to be left to visionaries.