Urban expansion in Switzerland: an exploration of external costs, effects of land supply and regulation rents

In densely populated regions, the rapid expansion of urban areas has significant negative side effects on the human and natural environment. Policies of containment and densification are increasingly used to counter these effects. However, compared with other sectors such as energy or transport, the external costs of urban expansion and the welfare and distributional effects of related regulations have received little empirical attention. The present paper uses a political economy framework and regional variation in land-use regulation to investigate (1) external costs of development, (2) effects and benefits of land-use regulation zoning, and (3) regulation rents generated by land-use regulation. Regional heterogeneity in land zoning by sub-federal governments is exploited to predict land prices and the quantity of development for a counterfactual policy with unregulated land supply. External costs of current urban expansion are quantified by assuming that existing restrictions on urban expansion balance consumer surplus and external costs of additional land development. The framework is applied to data from Switzerland where land use policy is subject to direct democratic control at the federal, cantonal and municipal levels. The analysis is based on the official land zoning and land use statistics and land price data for n=106 labor market regions. If the assumptions of the framework hold, the current annual rate of land development has external costs of CHF 11.5 billion. Higher regulatory supply of residential land was significantly associated with lower prices and more development per additional resident. For residential land alone, the estimated demand parameters suggest that zoning reduced development by 960 hectares and external costs by CHF 9.7 billion per year in 2017 to 2022 relative to the counterfactual without zoning regulations. Subtracting the CHF 2.6 billion in lost consumer surplus, the net benefits is CHF 7.1 billion per year. Doubling the current amount of development zones would reduce land prices by 16 percent. The price increase due to the existing regulations translates to CHF 612 billion in regulation rents or 14 percent of the total value of real estate in Switzerland in 2022. While these estimates are exploratory, they provide a first indication of the external costs of development and the benefits of zoning. They suggest that the regulatory restrictions on land supply are successful in saving land, but that the current policy also generates large rents and distributional side effects.