Virtually every town in the United States has zoning laws which affect land use, lot size, building heights, density, setbacks, and other aspects of property use. Zoning laws are government regulated restrictions on how a particular piece of land can be used – residential, commercial, industrial, agricultural, and recreational. They impose many use restrictions, such as the height and overall size of buildings, their proximity to one another, what percentage of the area of a building lot may contain structures, and what particular kinds of facilities must be included with certain kinds of uses.

Zoning laws were introduced to tackle a real problem – if you do not want a noisy bar next to your house, there should be a law to prevent the bar from coming up in your neighborhood. Zoning law does not target the starting of the bar but the damage that you may suffer if the bar starts in your neighborhood.

Zoning laws restrict freedom by constraining the right to private property. If you own a piece of land and you want to build a factory on that piece of land and your neighbors have no problem, then you should be allowed to build the factory. But zone laws will not allow you to build the factory on your own land if your land is located in a residential zone. Not all factories are polluters. By preventing factories from being set up in an area even if the inhabitants have no problem, zoning laws hamper the local economy.

The negative impact of zoning laws is not restricted to the local economy. It has an impact at the national level, as well.

America is in the midst of an affordable housing crisis. How does zoning contribute to this? The cost of land is about 20% - 25% of the total cost of the house.

In simple economic terms, the price you pay for a house is the price of land + construction costs + a reasonable profit for the developer. But that is not the case in many American cities. The cost of land is about 20% - 25% of the total cost of the house.

Housing prices are determined by both demand and supply concerns. If the demand for housing is very high and the developers are able to make a fortune, then the market ought to be flooded with new houses which will drive the prices down. But that is just not happening. There is something wrong on the supply side. Edward Glaeser of Harvard and Joe Gyourko of the University of Pennsylvania studied this problem and attributed the error on the supply side to zoning restrictions. They studied the data from over two dozen American cities and concluded that zoning restrictions kept the housing prices high and did not allow competitive forces to correct the supply and demand position. The average American home buyer ended up paying not just the price of land + construction costs + a reasonable profit for the developer, but also the cost for regulatory compliance – zoning laws.