The 21st century will be the century of cities, we’re told, and Mark Lutter would like to see it become the century of private cities — or proprietary communities:
Proprietary communities are communities defined through private property. A common example is a mall. It is owned by a proprietor who rents out space for income. However, in order to increase the value of the store space, the proprietor also must provide public goods, security, lighting, and open spaces inside the mall. Proprietary communities typically lease land to residents, with revenue the result of increased land value from the provision of public goods.
Proprietary communities offer a solution to a host of problems commonly assumed to justify government intervention. Private property internalizes externalities. Proprietary communities take advantage of that fact by creating private property over land spaces traditionally thought of as public domain. They work by creating a residual claimant in the provision of public goods. That is, proprietors keep as income the rents collected through leases after costs are deducted.
Economists tend not to worry about the provision of goods or services when such provision has the potential to make people rich. The private sector does a good job of making cars because people who make great cars will enjoy financial rewards. On the other hand, no one can get rich stopping overfishing, for example, which is why it remains a problem.
Proprietary communities offer people a way to get rich by providing public goods. Public goods affect the value of the land on which they are provided. A classic example is schools. Good schools can increase land value by thousands — if not tens of thousands — of dollars. Similarly, police, roads, parks, and sanitation tend to raise land values. Because a proprietor’s or developer’s income depends on the value of the land he is renting out, he has incentives to provide public goods as part of his total offering.
The two closest examples of proprietary cities are Letchworth and Welwyn, small cities of around 30,000 each founded by Ebenezer Howard on Georgist principles before being nationalized after World War II. Walt Disney World is effectively a private city unto itself, demonstrating the scalability of the idea.
Imagining a modern proprietary city is difficult. Order is defined in the process of its emergence and the market makes fools out of those believing they can predict its path. However, a conservative guess is that a proprietary city might look similar to Sandy Springs, a city in Georgia of 93,000 people, that outsourced public services to private companies after a bankruptcy crisis, obtaining creating a superior provision of public goods at a lower cost.
Like Arnold Kling, I’d like to know more about how and why private cities don’t emerge.