Saturday, 3 May 2014

Building Façades, Externalities, and Alternative Means of Exchange

Here's a thought: Living in a beautiful building, such as Frank Lloyd-Wright's Robie House, one cannot view the façade of one's house when one is in it (outside the beautiful stained-glass windows of Robie House is the Chicago Booth School of Business - not too bad, I suppose). From indoors, one can only look at neighbouring houses, as was observed once by a friend of my Uncle's. Therefore, your neighbours have a stronger incentive to make your house look nice than do you (maybe your incentive is not weak, but the neighbour's incentive should still be stronger). This is less true for very outgoing types, but even they probably look out the window more often than they look at their own house.

To internalize these externalities as much as possible, one might expect the neighbours with the clearest view to own your façade, as in Harold Demsetz's nice 1967 article on property rights, but then there would also be privacy concerns associated with their constant access to part of where you live, which would only increase the negative externalities involved (noise close to home, etc.). But Demsetz's analysis only says that the arrangement will prevail which best conserves on transaction costs and external effects.

So which arrangement is more successful at conserving transaction costs? The Coasean solution has it that, if neighbours own the façade of your dwelling, you would have to compensate them not to disturb you. If you own your dwelling's façade, your neighbours would compensate you to give it a nice appearance. Both arrangements could be associated with high transaction costs, but the risks of breaching private spheres are surely greater when neighbours come very near where you live. So transaction costs should be lower when the owner of the façade and the owner of the building are the same person.

How low are these transaction costs, though? What does it take for people to be willing to treat personal choice regarding building appearance as a tradeable good? Another way of asking this  is what the transaction costs are for using money in this market. After all, when building appearance and money are used in transactions, the latter might be what is behind the transaction costs. So the currency in this market could be overall treatment by neighbours; smiles and chit-chat, willingness to do favours, etc., rather than money (I have talked about such markets before). So an unkempt house is OK if its occupier is extra nice and expects less from his neighbours; a nice-looking home increases favours received. The means of exchange chosen in a transaction is the one that best conserves upon transaction costs.

This means that transaction costs are sometimes very high indeed if money must be used in the trade, but they are greatly reduced if another means of exchange be used instead. A lot of social situations are more easily manoeuvrable once this insight has been grasped. Maybe something else is the cause of nice-looking building exteriors, but externalities fit this case. In addition, my experience is that buildings have a lot more potential to be unkempt and ugly than they have to be prettier. I frequently find that the few changes I would make if I had ownership of others' façades are mostly down to personal and idiosyncratic preferences. Maybe chit-chat and neighbourliness suffice in this market?

The standard treatment may recommend a commission to impose building codes, or maybe even the introduction of an "ugly" tax. Some communities are planned in very great detail, of course (a memorable episode of the X Files is set in one such community), but normally a building's exterior is chosen by its owner. So the possibility of using means of exchange other than the one approved by the government confounds the standard proposals. If this works, where else might it apply?

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