Politics Foreign Affairs Culture Fellows Program

Market Urbanist Zoning: A New Approach to Externalities

Euclidean zoning has never stopped nuisances, although that’s its main purpose. A market-based code could address the problem more directly.

Why does America have zoning laws? Mainly to stop externalities.

Since it emerged in the Progressive Era, zoning was meant to prevent land development from negatively affecting people who live outside the development. Whenever an argument against zoning is made, skeptics inevitably ask something like: “then how will cities stop smokestacks from opening near daycares?” But this thinking is flawed.

Economist Edward Glaeser and legal scholar Cass Sunstein once proposed that all regulations undergo a cost-benefit analysis. What would such a look at zoning yield? The standard Euclidean codes that force separated uses have obvious costs: sprawl, auto-dependency, environmental hazards, deagglomeration, and more.

The benefits are less clear. Many argue that zoning protects abstractly-defined “quality of life” or “community character” goals, but those terms are subjective and difficult to define. The externality argument is used, too, but is often nebulous: externality concerns can range from traffic, to school crowding, to water supply. “Smokestacks near daycares” is the most extreme talking point, but that mix of uses would rarely occur today under market forces, and most zoning doesn’t address that exact scenario anyway.

To the extent there are valid concerns about development, Euclidean zoning poorly addresses them and fails the cost-benefit test, as do proposed alternatives like form-based codes, which police design rather than separating uses. So I’ve created an alternative: a Market Urbanist Model Zoning Code that addresses externalities while still encouraging development. Below is a graphic, followed by five defining principles for a Market Urbanist approach to zoning.


Euclidean zoning is over-simplistic: It designates large swaths of a city for single uses, forcing every parcel to conform (for example, yellow often denotes areas zoned exclusively for single-family residential).

Market Urbanist zoning recognizes that every parcel is different. Requiring every parcel in a given area to serve the same function makes no more sense than forcing every storefront in a retail strip to sell hardware. Market Urbanist zoning does not police use, instead it merely calls for baseline rules, described below, that apply equally to them all.


Form-based codes also prevent land from being solely regulated by use, making more uses allowable by-right. Market Urbanist zoning goes further, however: characteristics that are contained within the lot line, and devoid of external effects, wouldn’t be regulated, period.

In other words, almost any building would be allowed if certain conditions are met. Aspects like height, aesthetics, setbacks, floor-area ratio, and dwelling units per acre aren’t externalities per se, and thus aren’t regulated as part of Market Urbanist zoning. It just depends on whether those characteristics affect the city beyond the lot.


Possible outward effects of the development include “externalities”, which are nuisances imposed on other people, and “impacts” (discussed below). Externalities include air, light, and noise pollution, smells, runoff, and shadows.

Cities already have laws to stop many of these externalities. In a Market Urbanist 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 characteristics, or “actions” as above, won’t matter.


Even if a proposed building would break certain nuisance laws, the developer can get around them by negotiating with the impacted parties, which would mostly include neighbors.

For example, let us say someone wants to build a pig pen in a residential area. With normal zoning, this would be illegal outright. With Market Urbanist zoning it may also be, due to the noise, smells, and other externalities. But the pen owner could make concessions—the builder could reduce the externalities, for example by using advanced berms or insulation; or neighbors might tolerate the externalities if they receive payoffs.

Municipal governments could organize and enforce such negotiations. For example, the pen owner could purchase easements on affected properties, so future neighbors must tolerate the pen too—but receive payouts. This bargaining method, described by the Coase Theorem, might sound like bribery. But Ronald Coase, the Nobel economist who formed the theory, viewed it as an efficient and voluntary way to settle disputes.


Impacts, distinct from externalities, describe the infrastructure burdens from new development, like increased traffic, parking, and water use. Impacts are not viewed in a Market Urbanist code as a basis for obstructing projects.

But the impacts that new residents put on existing services does make the case for a user fee system. The amount the user pays depends on their usage level, and fee revenues help to maintain or expand that infrastructure.

For example, a skyscraper is proposed for a low-rise residential area. It meets all the externality codes, but neighbors fear its potential impacts. With Market Urbanist zoning, those impacts wouldn’t kill the project, but they can guide infrastructure policy. If on-street parking increases, the city can adjust curb pricing to manage demand. If the new residents cause school crowding, they can be charged school impact fees. And so on.

This model helps infrastructure scale to handle added burdens from population growth. It also dismantles the NIMBY (not in my backyard) arguments that existing residents might have about newcomers using “their” services. In a user-pays system, everyone is equal.

Pros and cons of Market Urbanism Zoning

Bottom line

This model may be unlikely in our current political context. But the philosophical point is crucial: Market Urbanist zoning doesn’t make any given building illegal. It identifies externalities and impacts that people dislike about a building and works to reduce them beyond the site.

The other point of a Market Urbanist code is to produce a better conversation about externalities, so there’s a clearer picture of what zoning even accomplishes. Right now, that doesn’t happen. For example, many cities require all parcels to have setbacks to prevent shadows, discouraging unique designs and consuming valuable space. Nobody asks how many of the city’s parcels actually need setbacks to prevent said shadows.

A Market Urbanist code could still have laws to prevent shadows, but that won’t mean every lot has setbacks. Instead, enforcement is case-by-case: If a proposed building would cast shadows on another, it could be set back or redesigned, or impacted parties can enter a private negotiation with the developer. Either option is less costly than requiring uniform setbacks citywide.

This thinking could apply to other zoning. If a community is worried about the mix of industrial and residential uses, must draconian use zoning apply to every lot? Or should noxious uses be addressed as they arise? If some businesses cause noise, should all businesses be separated from residential areas? Or should that too be enforced case-by-case, based on decibel levels? Market Urbanist zoning is meant to replace the inexactitude of top-down planning with precision and cost-benefit thinking to facilitate more permissive cities.

Scott Beyer owns Market Urbanism Report, and is a columnist for the Independent Institute, Governing, and HousingOnline.com.

Ethan Finlan is Market Urbanism Report’s content staffer.

This New Urbanism series is supported by the Richard H. Driehaus Foundation. Follow New Urbs on Twitter for a feed dedicated to TAC’s coverage of cities, urbanism, and place.