Welcoming Holmes Trust

If the real world were as simple and elegant as the content of the Coase Theorem suggests--that is, if private parties could bargain over resources without cost and therefore solve the problem of externalities on their own--then Central Square defender Jon Bekken would be busy bargaining with the Holmes Trust at this moment rather than complaining about Holmes' proposed development, as he did in The Crimson, in a March 3 op-ed.

In theory, economic efficiency can be achieved without government intervention when the externality affects relatively few parties and when property rights are well specified. But in Central Square, this is hardly the case.

The Central Square project involves many local residents, and Holmes is still waiting for the "green light" from the City Council and zoning officials. Until then, Holmes does not have the property rights at its disposal. The question is whether the project is necessarily bad for the local residents or if the local shop owners are simply forming one battlefront to protect their own interests. One answer can be found in externalities: whether or not this is a good project depends on the side effects it holds for the community. As this analysis makes clear, Central Square can only gain affordability and convenience from this project.

Holmes' Central Square project proposes to bring in new, nationwide chain stores and new residencies to local residents. While Holmes' development may distort the traditions and variations of the local community in the short term, it could benefit the local residents with efficiency, orderliness and higher standards of living in the long run.

A key negative externality that will result from the presence of the Holmes project is homogeneity. In the past, residents and tourists alike have been able to find a wide selection of goods in Central Square. However, when nationwide chain stores enter the neighborhood to satisfy only the needs of a "median consumer" (i.e., a typical household with median income and two children), goods become homogenous and reflect fewer of the extreme tastes that are appealing to minority shoppers (e.g. rebellious teens).

Bekken's suggestion that "locally-owned business serving residents of the surrounding working-class neighborhoods will be replaced by six floors of upscale chain stores and high-priced apartments" implies that Holmes nationwide chain stores will be exceedingly high-class and that the local residents will not be able to afford them. If this is true, it would result in a negative externality: the angry local residents would be forced out of local shopping areas by incoming affluent citizens, thereby disintegrating the current community.

But this may not be true. The prices of the products sold in the new stores will have to be competitive, given that consumers' demand for homogenous, substitutable goods is highly elastic. Therefore, the new stores will be forced to keep their prices competitive to target the local consumers' tastes. The new conglomeration of stores may provide shopping convenience to local residents, and therefore may carry a positive, efficient externality.

The single ownership of the project by Holmes will also lead to more responsible business practices. By owning the property and buildings of the shopping and residential plaza, Holmes will have a strong incentive to internalize any external costs, such as stores that create a lot of litter or noise. It will select "compatible" stores that are attractive to its consumers.

A small local owner is not able to do this. The small owner does not care who leases the property, as long as the store is paying its rent on time. The small owner has no incentive to watch out for drunkards who might frequent neighboring business.

In other words, the small, local owner does not internalize any external costs. But as the owner of the conglomerated properties, Holmes will remove many of the negative externalities that the smaller current owners might cause the community. If observing young punk skaters in front of Hubba Hubba is what Bekken defines as the "vibrant neighborhoods organized on a human scale," Holmes may actually be doing a huge favor for the community with the potential orderliness it would bring through new stores.

With the introduction of relatively more homogenous, upscale stores to Central Square, the rental prices of local properties will be bid up, since the new stores are willing to pay more for the "central" location. This is a major point of contention because most small business owners rent rather than own their space. For this reason, an increase in rent will translate directly into a lower or even negative profit margin. Small business owners are therefore vehemently opposed to the project.

In fact, the Holmes project will benefit many local homeowners because their house values will increase proportionally. With this increase in the real level of wealth, local residents may generate positive externalities such as purchasing a new automobile with lower waste-emissions than a used one, resulting in cleaner air. The negative impact of the Holmes project may not be as bad as its critics think.

While zoning is certainly important in maintaining the character of the local neighborhood, a failure to welcome changes that will bring positive externalities would be creating a situation like China before the implementation of the open-door policy: a stagnant and back-ward economy that some would likely call "local color."

Sadly enough, the shops that provide this local color and suit the curiosity of tourists cannot fulfill the daily needs of Central Square's local residents. Through the Holmes Trust project, new nation-wide chain stores may rightfully come to answer the practical needs of Cambridge's citizens.

Benji Z. Chen '00 is an economics concentrator in Pforzheimer House.