Random thoughts of an economist

Historic preservation is other people’s job

Posted in Economics, Environment, Historic Preservation, Hong Kong, teaching by kafuwong on May 17, 2014

A historic building near my workplace was being demolished to make room for a residential high rise. Some of my friends were annoyed by such development. They wanted the century old building to be preserved.

Obviously, there is a conflict in opinion of the owner and the public (my friends included) on such historic preservation issues. Lured by the hefty offer, the owner wants to sell the property to the developers. The public want the preservation. The owner would have no objection on the preservation if someone is willing to compensate him for the opportunity (of cashing in). The preservation should be done only if the total willingness to pay (from the public) for the preservation is larger than the best alternative (the value of the property. development). The big question is how much the public are willing to pay to the owner, in total.

Due to the public good nature, such decision and the finance of historic preservation often falls into the hands of the government. And, naturally, the government has to weight the conflicts.

People’s behavior is predictably rational!! If it is my property, I would like to be able to sell to the developers and pocket the money. If it is other people’s property, I would vote to force the owner to keep it as a heritage building. When we do not have to pay a cent, a lot of us will cry “preservation”. Yes! Let the government buy out the property! We tend to say we are willing to pay a lot to see the preservation.

This is a typical example of public good provision. When we do not have to pay for the public good out of our own pocket, we tend to claim we are willing to pay a lot for the public good. That is, an exaggeration of our willingness to pay in order to influence the decision of the government. If we rely on this process, we will have an “over-supply” of historic preservation. Imagine, we create a voting site for every historic preservation in question. Can you guess how many historic preservation projects will be done? In fact, almost all the time, no voting sites are created, no opinion polls are done. Often, we use the media to create a feeling that the public is willing to pay a lot for the reservation.

In the contrary, if we have to pay whatever we claim we are willing to pay, we tend to report less because one person’s understatement will unlikely change the decision of the government (that is approximately based on the total willingness to pay for the preservation and the value of development) and yet an understatement of our willingness to pay can help reduce our payment. When everyone is thinking in the same way, we will have an “under-supply” of historic preservation. Imagine, for every historic preservation in question, we can set up a donation account. Can you guess how many historic preservation projects will be done?

Like many public goods, the optimal supply of historic preservation is non-trivial. The key is to find out how much the public is willing to pay for the preservation. While it is possible to adopt some mechanism (e.g., Clarke-Groves mechanism) to induce people to truly reveal their willingness to pay, the decision of historic preservation often relies on a group of experts, and sometimes political debates.

Why do we rely on a group of experts? Because what the public say may not be as trustworthy as the impartial expert group.

[Additional reading: Handbook on the Economics of Cultural Heritage edited by Ilde Rizzo, Anna Mignosa.]

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