Question

Explain why zoning laws, which allow certain land uses only in specific locations, might be justified in dealing with negative externalities. Explain why in areas where buildings sit close together, tax breaks to property owners for installing extra fire-prevention equipment might be justified due to positive externalities.

Short answer

The zoning laws protect the environment or the inhabitants who would be affected by the clustering of certain economic activities that create negative externalities in specific regions.

The positive externality effect of installing extra fire prevention equipment in terms of reduced risk of a fire and its potential spread to nearby buildings encourages tax breaks to property owners.

Step-by-step solution

Step 1. Negative externality and zoning laws

A negative externality occurs when certain economic activities put a cost burden on a party that was not involved or considered while making the market decisions of production or consumption. These are the external costs that impact the well-being of others.

For example, if a person is smoking, it will affect not only his/her health but also the people standing. They are inhaling the smoke even though they are not smoking. Thus, the consumption activity of that person is putting costs on others.

Zoning laws prevent or reduce the external costs of economic activities associated with the use of land by allocating land use according to the regions. It prevents the construction of certain buildings or plants that can have harmful effects on the surroundings in the future. These negative effects are not considered when such buildings are used for economic activities.

For example, the zoning laws prevent the building of a polluting factory near a residential area. People can suffer from diseases and other harmful effects due to the noise, air, or water pollution created by the use of such buildings. Hence, these are justified as they deal with negative externalities.

Step 2. Reasons for tax breaks to property owners for installing fire prevention equipment

A positive externality occurs when certain economic activities benefit a party that was not involved or considered while making the market decisions of production or consumption. These are the external benefits that impact the well-being of others.

For example, gardening helps create a beautiful and fresh environment for the passers-by who did not contribute anything to this economic activity.

Fire equipment installed in a building will not only protect that building but will also protect the others by preventing the spread of the fire. This is a case of positive externality where the other buildings are protected indirectly by stopping the fire spread. The other closely located buildings do not directly need to buy and consume fire prevention equipment. These are external benefits that create free riders.

Thus, a tax break to property owners is justified based on the total social benefits of having fire prevention equipment (including both private and external benefits).