Externalities and Planning Failure in the Housing Market of an African City

Purpose: Planning is logically applied to address negative externalities but an alternative is financial compensation to the victim of negative spill-over effects. This paper examines the rent discount required to compensate tenants in an African city for a negative externality of the location of a grave within the bounds of their home. It also assesses the suitability of this as a remedy.

Method/Design: This study adopts a discrete choice experiment to analyse tenants’ acceptability to levels of rent discounts when a grave is imposed on their home.

Findings: The study estimates that tenants in the Nigerian city of Akure require a reduction of between a 15% and 20% reduction in the rental value of a residential property to compensate for the imposition of grave. However, many households would prefer to move rather than negotiate a discount. Others, especially those on low incomes will likely suffer the loss of welfare without a rent discount. The study concludes that a compensatory approach is not an acceptable solution to welfare issues caused by the planning failure.

Practical implication: As reductions in rent to compensate for the effect of a grave in a private home are unlikely in a market with excess demand it is a clear argument for effective planning and environmental law.

Originality: It is the first study of the impact of negative externalities on the housing market of an African city.

Limitation: The investigation is based on a hypothetical choices experiment. However, the results obtained are subject to a series of validation processes.