Wednesday, March 11, 2015

No distortion

We know the story of the original Disneyland (Anaheim in the 1950s) developed in a then rural area and soon enriching nearby landowners as the park boomed.  The corporation soon figured it out and when Disney World was developed near Orlando in the 1970s, they bought most of the nearby land (or options to buy) so that the benefits they create would accrue to them.
Today's WSJ includes "Apple gets sweet deal from mall developers ... As a traffic magnet, iPhone maker is able to negotiate lower terms for rent ..." What may have been mysterious to the Disneys in the 1950s is common knowledge today. Land markets can internalize externalities. This is especially the case where there is a single land owner (residual claimant).
Textbooks (and many others) routinely refer to externalities as case of "market failure." But there can also be incentives to internalize any externality. Why else bother to assemble all those parcels?
The WSJ's writer speaks of Apple's deal as "... distorting the market for mall rents ..."  No distortion at all.