Surplus Cities : An Investigation in Density Externalities and a Consequent New Approach to Urbanism

Abstract: The founding premise of this paper is simple; that urban density has positive externalities and that these are unaccounted for in the developers’ density choice. This paper looks at the incentive structure of individual developers though a theoretical perspective and shows that the density choice is a suboptimal product of a prisoner’s dilemma game. Two mechanisms are proposed to achieve the optimal level of density. The first is an Inverse Density Tax which fixes the incentive structure at the agent level by internalizing the positive externalities of density. The second is the Supply Buffer which solves the regulation problem. The disconnect between what is good for a city and what policies are actually practiced by planners is addressed by suggesting a new approach to urbanism called the Surplus Cities approach which suggests a more positive approach to urbanism instead of the multitude of normative approaches that encompass the existing urban planning profession. The significance of the model in the paper is that it shows that the optimum density a developer should build is not the commonly accepted quantity where marginal revenue equals marginal cost, but greater due to positive externalities of density. In addition this paper presents the tools to a) achieve the optimal level of density and b) introduce a separation of powers in municipal government between planning the city and controlling real estate supply which restrains the growth of cities; as has been a prominent subject of contemporary urban economics discourse.