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The key to successfully resolving urban problems that seem to require master-planning is to understand existing decision processes. Some of the “chaos” that planners and established residents seem so eager to suppress is actually the tangible reflection of diverse preferences among different people. And some, as Jacobs observed, flows from the change that inevitably accompanies a dynamic economy. Efforts to eliminate this chaos cannot be accomplished without suppressing freedom and squelching economic prosperity. Such chaos is the sign of an economy that is working.
But other urban characteristics, like air pollution and traffic congestion, result from decisionmaking processes in which important knowledge is not being conveyed. People are, for example, choosing to drive to work at rush hour all alone in their automobiles without recognizing that highway space is limited. Or factories are emitting pollutants into the air as if the atmosphere could, without loss of air quality, absorb the emissions in unlimited quantities. Or low-cost housing is not being built. Here the key issue is how best to convey the missing pieces of information so that people alter their behavior.
All decisions, public and private, are shaped by individual preferences combined with external incentives. To change the outcome of decisions, policymakers can either hope to change people's preferences or alter the incentives they face or ignore both preferences and incentives and legislate behavior. The latter course—the planning approach—erodes freedom and entails high information costs. And changing people's preferences is akin to the ill-fated efforts of various Communist regimes to fashion a “new man.” Such efforts have failed even when governments resorted to Draconian “reeducation.”
It is possible, however, to alter the incentives people face in their daily decisions. At the root of many urban problems, especially air pollution and traffic congestion, is the simple fact that air and roads are “free goods”—treated as if they are available in unlimited supply. Commuters pay nothing to use the roadways. Polluters pay nothing to dump byproducts into the atmosphere, and most of us capriciously toss out trash as if landfill were limitless. This means that vital information about the relative scarcity of air and roads and landfill is left out of the decisionmaking process.
Public planning focuses on the ill-effects of this imperfect process and imposes regulations designed to achieve some different outcome. The result: In the case of pollution, an AQMD-style compendium of edicts mandating how Los Angeles residents and businesses are to conduct their affairs and to combat the trash problem, we get mandated recycling programs. But such regulations still convey to commuters and polluters no information about the costs of their behavior.
Or, in the case of housing, planners “downzone” urban areas to reduce crowding and congestion. But by ruling out low-cost, high-density housing, they block the ability of the market to respond to people's needs.
Public planning, espoused in the name of harmony and rationality, actually provokes discord. It interrupts the flow of information from consumer to producer and back. And it does nothing to improve the flow of information about scarcities where the marketplace, with its price-coordinated transmission of knowledge, is not working.
Where price signals are absent, as in the use of air and roads, the most effective approach is to introduce price signals rather than presume to plan away the ill-effects of their absence. Create institutions—like air rights or toll roads—that get individuals to take into account the costs of their behavior. Faced with higher costs of driving alone down the freeway at rush hour, for example, some people will switch to public transit. Others will carpool. Still others may move closer to work.
And rather than overcoming the “out of sight, out of mind” mentality toward garbage with mandates and city-financed recycling plans, the more effective solution is to introduce pricing that varies depending on how much garbage people produce. City officials in Seattle did just that. Seattle citizens now have choices. They can buy more recyclable goods and produce less garbage to keep their trash bill low. Or they can maintain their old habits, but pay higher costs for the volumes of waste they generate.
Unlike planned solutions to traffic congestion and landfill scarcity, using price signals lets individuals make their own trade-offs, their own choices, about how to respond to changing circumstances. As Sowell neatly summarizes, “more options generally mean better results when the larger number of options includes all the smaller number of options.” Planning excludes options. As a result, we are all made worse off.