Cities are more than places where we live and work; they are places we see, experience, and remember. Architecture plays a central role in shaping these everyday encounters, influencing how urban life feels as much as how it functions. Yet, despite its obvious importance, architecture has remained largely outside the core of economic analysis. In our recent research, we argue that this omission is not only surprising, but costly.

At its core, architecture is a textbook example of a local public good.

While the costs of high-quality architectural design are borne privately by developers, many of its benefits spill over to others: neighbours, passers-by, and future residents. Distinctive buildings contribute to the character of streets and neighbourhoods, raise the appeal of surrounding locations, and improve the amenity value far beyond the building’s occupants. Because developers cannot fully capture these shared benefits, high-quality architecture tends to be systematically underprovided.

This logic is well understood in welfare economics. Similar arguments justify public support for parks or clean air. Yet, in contrast to these domains, the economics literature has long treated architecture as peripheral – despite its central role in shaping the lived reality of cities.

What we do

Our aim is to bring architecture into the core of urban and welfare economics. We do so by developing the first quantitative framework that allows us to rigorously study architectural quality, its spillovers, and the policies designed to address the resulting market failures.

We combine three elements. First, we synthesise a growing empirical literature that measures how architectural quality is reflected in real estate prices. Across dozens of studies, we find that buildings with distinctive or high-quality design sell at an average premium of about 15 percent. Importantly, nearby buildings also benefit: design spillovers raise surrounding property values by roughly 9 percent. These findings confirm that architecture creates substantial economic value – both privately and socially.

Second, we provide new evidence on how heterogeneous people’s tastes for architecture are. Using an original survey in which respondents rate real-world buildings, we show that preferences for architectural design vary widely, much like preferences for neighbourhoods or locations more generally. This heterogeneity matters: it implies that while good architecture is valued, its marginal value declines as distinctive design becomes more common.

Third, we embed these empirical insights into a quantitative urban model. The model captures developers’ design choices, residents’ location decisions, and local design spillovers within a neighbourhood. Crucially, it allows us to simulate counterfactual policies and evaluate their welfare effects – something that had not been possible before.

What we find

Our analysis confirms a clear coordination problem. Individually, developers have too little incentive to invest in architectural quality because they do not internalise the benefits their design choices create for others. As a result, cities end up with less distinctive architecture than would be socially optimal.

We then ask how different policies perform in correcting this market failure.

The most direct and effective instrument turns out to be a Pigovian subsidy for distinctive design. In our simulations, the welfare-maximising subsidy amounts to around 10 percent of construction costs for distinctive buildings – equivalent to about one-third to one-half of the additional cost associated with higher-quality design. Such a subsidy increases architectural quality, raises overall welfare, and does so at relatively low fiscal cost.

We also evaluate policies commonly used in practice, such as granting additional floor area (FAR bonuses) to architecturally distinctive buildings or designating special districts with mandatory design requirements. These policies can improve welfare under specific conditions, but they are far more fragile. FAR bonuses, for example, only work well in already supply-constrained environments and can easily generate welfare losses if miscalibrated. Large mandatory design districts may also crowd out distinctive architecture elsewhere.

Finally, we examine the idea of “super-developers” who control large areas and can internalise design spillovers. While such arrangements can improve outcomes, they also create incentives for rent-seeking and strategic restriction of supply, making their welfare effects uncertain in practice.

Why it matters

Architecture shapes cities for decades, often centuries. Decisions about design made today determine the quality of urban life for generations. Our results suggest that leaving these decisions entirely to the market leads to systematic underinvestment in architectural quality – not because developers are short-sighted, but because the benefits of good design are inherently shared, but the costs are not.

But the policy stakes go beyond correcting a textbook externality. Cities bundle many local amenities – architecture, green space, heritage, public realm – and people differ sharply in how they value these attributes. Understanding the distribution of tastes matters because it determines who benefits from an amenity upgrade, how quickly marginal willingness to pay declines as an amenity becomes more abundant, and how strongly households sort across neighbourhoods in response. In other words, amenity policies influence not only how attractive a city becomes, but also who chooses to live where, and who ultimately benefits from these improvements.

By providing a quantitative framework grounded in empirical evidence, our work opens the door to a more informed policy debate about architecture. It shows that supporting high-quality design is not a matter of taste or elitism, but a classic case for welfare economics – while also highlighting why “one-size-fits-all” design interventions can misfire when preferences are diverse. Thoughtfully designed policies can better align private incentives with social benefits and, in doing so, make cities better places to live.

The authors

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