Why do American cities have zoning? For three reasons.

The first is to curb externalities – essentially the bad unintended consequences of the development choices we make. Those include fouling of the air, unwanted noise and loss of outdoor light. A second reason is to reduce the burden that new development puts on public infrastructure. And the third is to prevent perceived changes to what we perceive as “community character.”

The types of zoning normally used for all this are Euclidean codes, a regulatory concept from the 1920s that separates uses, often designating large sections of a city either residential, industrial or commercial. But Euclidean zoning is flawed.

Economists Edward Glaeser and Cass Sunstein once proposed that the U.S. put all of its regulations through a cost-benefit analysis. What would we learn from that kind of analysis? We’d learn, among other things, that Euclidean zoning gives us sprawl by mandating single-family homes on large suburban lots from which driving is the only realistic option. Are the perceived benefits worth it?

I doubt it. Reducing externalities is a coherent goal, but separation of uses is an inexact, high-cost solution for that. Popular alternatives to traditional zoning, such as zoning by building form or measuring performance, don’t solve the problem either.

So let's try a thought experiment, one we might call "Market Urbanism Zoning."

Suppose a city scraps its Euclidean code, allowing any development use on any parcel. How, then, would the city prevent the externalities and impacts that come from that development? It would do so by addressing them directly, rather than outlawing the development altogether. Market Urbanism zoning, above all, is less interested in what goes on a parcel, than how that usage affects city life beyond the parcel.

Nearly all cities have laws on the books which limit nuisances like noise and runoff. In my hypothetical code, those laws would remain in effect, and it would be the responsibility of a building developer or manager to follow them. But as long as a building does that, its usage and other characteristics won’t matter. That is because standard Euclidean aspects like height, aesthetics, setbacks, floor-area ratio, and dwelling units per acre aren’t externalities per se. It just depends, again, on whether those building characteristics affect the city beyond the lot.

A Market Urbanism code would not rely solely on laws to handle externalities; it would first allow for negotiation. Suppose an entrepreneur wants to open a nightclub in a residential neighborhood with a tight noise ordinance. The prospective owner can offer the residents payments for the increased noise. If neighbors are willing to tolerate the noise in exchange for compensation, the nightclub can be allowed. Similarly, a farmer who wants to build a pigpen in a residential neighborhood could provide compensation if the neighbors agree to tolerate the smells. Or the pigpen owner could use enhanced insulation that “internalizes” the odors, rather than letting them reach the neighbors.

This might sound like bribery. But it’s an efficient and voluntary way to settle disputes. Municipal governments could organize and enforce such negotiations. For example, the nightclub owner could purchase easements on affected properties, so that future tenants who move there willingly must tolerate the noise too - but will also receive payouts.

The second big goal of Market Urbanism zoning is to mitigate broader impacts more intelligently. These, too, are often cited as reasons to oppose growth, since a given development will burden the school system, increase traffic and strain public utilities. A Market Urbanism code does not treat impacts as a basis for stopping projects; instead, it calls for cities to address the impacts through user fees.

Suppose a high-rise, mixed-use building is proposed. It meets all the externality codes, but the community is concerned about impacts. So the city uses pricing to address these impacts on a case-by-case basis. If the building’s retail component increases on-street parking needs, the city can adjust curbside parking to prevent congestion and encourage a smoother flow of traffic. The impact on schools and water provision would likewise be handled through pricing: The users in this new project pay based on their usage levels of water and other elements of infrastructure. Fee revenues help to maintain or expand that infrastructure to meet increased demand.

A Market Urbanist approach to zoning recognizes that growth is a net positive, and that individuals should be free to build, live and engage in commerce in any neighborhood, so long as they don’t harm the community or environment. It uses regulation only to mitigate impacts and directly prevent externalities, encouraging developers either to internalize potential nuisances, or negotiate with residents. But its main point is to allow more development than is possible under normal Euclidean rules. 

That doesn’t mean Market Urbanism zoning is a panacea. Introducing negotiation into the development process may complicate land deals. And of course, an approach that presumes growth as a positive won’t satisfy people who don’t want to see any change at all - a constituency which is often vocal and organized, if sometimes overstated in size.

Nor is Market Urbanism zoning politically likely at this point. The goal of my thought experiment is just to highlight that cities are dynamic, ever-changing places, and the means of resolving resident-developer conflict should be dynamic as well, rather than being encoded into a complicated, inflexible set of regulations.

If a community is worried about the mix of industrial and residential uses, must rigid use zoning apply to every lot? Or should noxious uses be addressed as they arise? If some businesses cause noise, do all businesses have to be separated from residential areas? Why can’t the rules be enforced case-by-case? A Market Urbanism zoning code that targets specific problems using a light set of legal guidelines, rather than banning uses outright, would foster not only more permissive but also more successful cities.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.