Planning for Problems with Short-term Lets? A Comparative Economic Analysis of the use of Town Planning Versus Private Law Systems to Tackle Spill-over Effects

Abstract

New business models, such as that of Airbnb, have led to a rise in the use of residential properties as short-term lets. In this paper, the writer considers the social efficiency of the use of the public town planning system and alternative private law systems, to regulate the activity. Specifically, the paper considers the use of these in order to tackle spill-over amenity effects upon neighbouring properties. The writer applies the general framework of Ellickson (1973) in performing a comparative economic analysis of the systems. This includes an analysis of the “90-nights” rule of UK planning law, which applies to London. The writer argues that in the specific case of short-term lets, the private law systems disclose relatively low transaction costs. This, in conjunction with their allocative efficiencies, makes them preferred to town planning. Taking into account the problem of nonconvexities, it is concluded that the “90-nights” rule, and the requirement for planning permission for short-term lets, should be repealed. This conclusion encloses an understanding that the amenity effects considered here involve little uncertainty. The courts, if equipped with private information from litigants and public information from development plans, are well placed to regulate this activity.