Building Codes: What Are They Good For?

Alastair McFarlane
Janet Li
Michael Hollar
U.S. Department of Housing and Urban Development

The views expressed in this article are those of the author and do not represent the official positions or policies of the Office of Policy Development and Research, the U.S. Department of Housing and Urban Development, or the U.S. Government.

This article presents an economic framework for evaluating the net benefits or costs of building code regulations through their effect on housing markets, accounting for distributional impacts. The role of building codes can primarily be classified into three scenarios: (1) An industry standard that reduces transaction costs; (2) An isolated quality standard; or (3) A quality standard with spillover effects. To holistically evaluate the impact of a particular building regulation, we propose three major guidelines: (1) Correct market failures; (2) Estimate market impacts; and (3) Account for distributional considerations. This framework is applied to energy efficiency regulations and solar panels in particular. Energy efficiency codes reduce negative environmental externalities and information asymmetry and promote high-quality long-term affordable housing stock; however, the willingness to pay for energy efficiency varies with income. Policymakers must consider how policies intended to promote the welfare of low-income housing residents might create exclusionary impacts due to increasing the cost of supplying housing.