Elements of an economic justification for municipal zoning

The possibility that externalities will produce a nonconvexity in the social production set limits the application of both the Coase and Pigou solutions for achieving an optimal allocation of land resources. Conditions on relative land prices are derived which indicate that external effects are strong enough to introduce a nonconvexity into the production set. These conditions were not fulfilled in a sample of single-family and multifamily dwellings in Foster City, California. This does not preclude the possibility that they are fulfilled in cases of more severe external effects.