Should buildings stay up?

31/10/2011 § Leave a comment

The Dom Post today had an article on a city council proposal:

Wellington ratepayers could be forced to help fund millions of dollars in earthquake strengthening work for privately-owned buildings under a controversial city council proposal.

We have privately-owned buildings whose owners earn rents from the properties. The council is suggesting that the public should make these private buildings better. Why?

Let me reach into my economist’s kit bag. This looks like a queston of externalities. But what kind of externalities?

We could think in terms of positive externalities. Let’s say an owner spends the money to have a really stout building. The owner bears the cost of that work. The people who shelter in the building during and after an earthquake, particularly people who just happen to be passing by, don’t have to pay for that shelter. If the building is then commandeered for post-event activities, the thousands of people who benefit also won’t be paying. Even just knowing pre-event that there are potential locations for such post-event activities is itself valuable.

Negative externalities describe what happens if a building does collapse. The building may cause casulties as it shakes apart. Once it has collapsed, it will certainly have spilled beyond its designated footprint. Bits of it will lie on the public footpath or road, or on neighbouring properties. With really big buildings, the threat of collapse can affect a large area. The owner has saved money on earthquake strengthening, but imposed costs on others.

Thinking about this as an externality problem takes us to two different answers. In one case, the council should help strengthen the private buildings in payment for the positive externalities. In the other case, owners should strengthen their own buildings so as not to impose costs on the rest of us.

But underlying all this is a question of what we expect from a ‘normal’ building. Whether externalities are positive or negative is related to our expectations of the world around us. Second-hand smoke is a good example: it went from being perceived as a fact of life to a negative externality. Hence the question: under what conditions do we expect buildings to stay up?

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