It is just a litle stale now but I am writing this R1 because

• In a world were supply restrictions (zoning) of housing are binding it is obvious that developers recieve a windfall when they get their property upzoned. There are many people who see this windfall from the upzoning of the developer's parcel, no measurable benefit to the public (because it is just one parcel) and then come to the conclusion that weakening/removing supply restrictions wholesale would just be a give away to developers with no benefit to the wider public.

• /u/besttrousers asked me to but, we will get to that part at the end.

Before i start I want to note that everything is not as simple as I will present. In large I will be arguing about the housing market as housing. I realize preferences are distrubited accross mulitple variables for housing including proximity to amenities, service and jobs, housing type, housing s.f., land s.f., privacy, etc., etc., etc. I will make an aside about location (the market really wants some particular mansions to be apartment complexes) and there is some upward pricing pressure (that I will ignore) when you remove 1 mansion to build 350 apartments that is just maybe significantly outweighed by the downward price pressure of 350 households no longer being forced to compete in the single family market.

The article of interest ends where it should have begun. At the end they have a discussion about the economics of redevelopment/the economics of development at different density levels. For our purposes it is a good enough outline although it does have the glaring flaw of not considering the costs of construction. If you are interested in a similar analysis including realish world cost I have a paragraph in this comment about the Heights neighborhood in Houston,TX. So in any given market developers will choose the housing mix/density level that will maximize their profit given land values and construction costs, nothing controversial there. Where the article goes off the rails is forgetting that the market has legal supply restrictions (which is odd, but common, given that supply restrictions is the whole point of the article) that cause a seperation between the cost of housing and the Willingness To Pay.

Under a binding legal constraint on housing supply one would expect to find that Willingness To Pay is greater than cost, fig1. In the article they claim that given supply restrictions willingness to pay for apartments is higher than the costs of construction. They claim that for some location an apartment complex of 350 units could be built more profitably than a mansion 2 miles away. They then go on to claim that supply restrictions (through the form of minimum lots sizes and maximum floor to area ratio) therefore lower the price of mansions.

Now on some margins this could be true.

• It could be that a signifcant portion of the demanders in the market have strong preferences for large houses on large lots such that the loss of one mansion has a stronger upward price pressure on mansion prices than the provision of 350 substitute housing units in the form of apartments. This is not likely to be the case if as we are assuming the supply constraints are binding and the 350 apartments are more profitable to build.

• There are some mansion parcels close to jobs, services, and other amenities where land values are really high (this would also have higher mansion prices) that the market really wants to be apartments instead.

On the other hand under standard simplified analysis, we expect no such thing.

As one can see, in a standard analysis, Fig 2., a loosening of the supply restrictiong (upzoning) will allow the developer to receive excess profits ((WtP2 - Construction costs) x number of units) but will also move us down the demand curve lowering the market price for housing from P1 to P2. In extrema Fig 3. if we moved to free markets housing price would fall to the costs of production and Excess Profits to Developers would fall to 0. In the end any movement to lessening supply restrictions will lower the price of the remaining acre lot mcmansions.

Alternative R1: besttrousers - "Cartels have nothing to do with undersupply, high prices or excess profits, WTF are you talking about?"

In this thread, where I brought this up, I attempted to use an analogy to the standard analysis of cartels, as presented in Mankiw's chapter on oligopoly, cartels and game theory, to attempt to show why the article gets the price effect of zoning on mansions wrong. I apparently went wrong because I couldn't get besttrousers to understand what I was jabbering about.

First of all one can note that in a proper R1 I didn't mention Cartels at all but, in my defense,

• The standard analysis of the effects of cheating cartel member is exactly the same, Fig 2a compared to Fig 2., except for the inclusion of a Marginal Revenue curve.

• BT kept pushing back on zoning being a legal supply restriction instead of a cartel agreement.

1. I don't think there would be any problem conceptualizing NYC taxi owner's as a cartel that uses a captured regulator to enforce their cartel.
2. Why is 500,000 property owners getting together and voting for their government to limit building necessarily any different?

• Essentially I assumed

1. the economic effects of supply constraints are the economic effects of supply constraints
2. most people would be familar with the analysis in Mankiw's chapter on Oligopoly, Cartels, and Game Theory that shows how not obeying otherwise binding supply constraints can benefit a single producer while also lowering prices
3. this analogy would be clear

Was I wrong?