I often use the following from The Economist (March 1, 1997) as a classroom conversation starter: “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.”
There are no uncompensated externalities and profit-seeking mall owners will act quickly to rectify mistakes in terms of what is located where.
The question is: How scalable is this approach? The development cited here probably provides its own infrastructure but hooks up to traditional infrastructure providers somewhere up-stream.
Today's WSJ includes a description of conventional urban planning in NYC ("Not Visionary Enough"). Whose visions? The article mentions various stakeholders and interest groups. Those who object to privatized land use planning are stuck with two old (and daunting) problems. (1) the politics, as noted in the NYC story; and (2) the riddle of how NYC planners and politicians could possibly know enough to somehow discover the best land use arrangements.