Cities are the locales of numerous interactions that generate externalities—both negative and positive. Although the common law provides a vast array of mechanisms for limiting negative externalities, there is a striking absence of provisions for stimulating the production of positive ones. As a consequence, activities whose social benefits are greater than their private costs are not undertaken, with a resulting efficiency loss.
In this Article, we demonstrate how cities can develop commercial districts that allow for the capture of positive externalities by following the example of suburban malls. In malls, anchor stores provide positive externalities—additional customers—to neighboring stores. Anchors capture these externalities through the subsidized rents they pay to mall owners, who in turn charge higher rents to the smaller businesses who benefit from the additional traffic. This private law mechanism provides a strong reason for large stores to locate in suburban malls—where they can recoup some or all of the spillover benefits they provide—as opposed to urban centers, where they are unable to recover the benefits they provide to neighboring stores.
Businesses in cities may generate similar positive externalities, but the law offers virtually no mechanisms by which they can recover any of the value of the benefits they provide. We argue that cities should use public law to create planned commercial districts, analogous to suburban malls, which would allow for the capture of positive externalities among commercial establishments. We also discuss how cities can use the legal powers at their disposal to achieve this goal. We submit that the reconfiguration of downtown areas will not only result in the production of new positive externalities but will also reduce the negative externalities associated with urban sprawl.