Month: March 2019

Let Market Decide Land Use Safety

When third parties object, land use issues are decided by those who have the most political power. Emotion or corruption often win the day.

Some predict that environmental disaster will occur, and believe that such predictions should allow the veto of other people’s property rights. Others think economic development should be encouraged, and the benefits outweigh the risks.

A free market solution following a process similar to the following is proposed:

  • The possible worst case scenario from any development should be identified by disinterested third parties.
  • Economic analysis should be used to determine the cost of damages if the worst case happens.
  • A safety factor based on the historical accuracy of damage estimates should be applied to the maximum conceivable damages to quantify the risk exposure.
  • The developers should then have to buy a bond with a value equal or greater than the risk exposure, insuring the ability to indemnify anyone who may be damaged by the project.

If it is highly unlikely that these damages would occur, then the cost of the bond would be low, and the project will be economically feasible. Otherwise the cost of the bond would be so excessive that the project would not be economically feasible.

For example, the market value of all property in Lee County Florida is about $160 billion.  The market value of the lives of people in Lee County can be determined by the amount of life insurance purchased by approximately 750,000 Lee County residents to cover death due to development disasters. For discussion purposes, assume each resident has a million dollar policy, with a total exposure of $750 billion.

If it is possible that a proposed project would make all of Lee County worthless, and kill everyone in the county, then the developers would have to post a bond worth more than $910 billion.

The insurance market with skin in the game would then determine how likely there will be significant damages, and price the cost of the bond accordingly. Those who want the project could make donations toward the cost of the bond to lower the developer’s cost.

Such a plan would not guarantee that the right decision will be made, but alternative politically based decisions provide no guarantee, and provide no indemnification for those who get damaged.

This article was prompted by an article distributed by the Estero Council of Community Leaders as republished on The Masters Website.