V. Suburbanization and the Cost of Government

One of the more controversial aspects of land development is whether it "pays its way." Many people would have fewer concerns about suburban development if they believed tax revenues from new development covered the costs of providing services, particularly roads, sewers, water services, solid waste disposal, and schools.

The fear that new development may not pay its way is partly a function of how these services are provided. Since many services — including schools — are provided by local governments, they tend to be "priced" at their average cost. For example, when a local government considers extending a water line to a new home, it often bases its fee on a citywide average as opposed to the actual costs of extending the hook-up to that particular site or development.

In addition, the first developers must cover the full cost of extending the main trunk line to the new development based on established density guidelines or the zoning code, regardless of the number of units the developer plans to build. The initial capital costs may thus be imposed on the first property owner who wants to develop his or her property. This approach to infrastructure pricing tends to discourage "in-fill" — the development of vacant land in between already developed areas — and to instead encourage large subdivisions where developers do not subsidize later arrivals.[51]

Since publicly provided infrastructure services tend to use average cost pricing for new extensions, the potential for subsidizing new development exists. For example, a city might determine that the initial cost of tapping into the city’s sewer system averages $4,000 and assess that fee for every building unit, regardless of the individual building type. In some cases, the actual cost to the city might exceed $4,000 but the builder or developer will not be charged for the full costs, thereby subsidizing the development.

In contrast, marginal cost pricing is more typical among privately provided services. Prices for new water extensions are based on the cost of each new project rather than a citywide average. This means the marginal cost of extending the service is assessed against the user and capital costs and other costs such as debt are incorporated into the price of the service.

The fear that development does not pay its way has prompted some citizens’ groups and public officials to advocate and impose growth controls or otherwise limit new development.