One thing few visitors to Tbilisi fail to notice is the rich and layered architectural heritage of the city. There are medieval churches in Old Tbilisi. There are art nouveau buildings in Sololaki. There is Stalinist architecture in Vake. And there are modernist experiments such as the Wedding Palace or the former Transportation Ministry Building. But at the same time, this rich architectural heritage is threatened – either left to decay or destroyed or overwhelmed by new building developments.

One worrying development is the proposed reconstruction of Gudiashvili Square in Sololaki. One of the loveliest squares in Tbilisi, a proposal by an Austrian architectural firm would completely destroy the historic substance and the unique atmosphere of the square. Fortunately, this proposal caused a firestorm of protests by concerned citizens, and Tbilisi city hall denied that this project will be implemented and is not more than just a private competition without any bearing on the future of the square. Although the architectural firm Zechner & Zechner claims that “The result of the study will be the basis of an intense discussion and process together with interested participants and the urban government“, so far they do not seem to be interested in any discussion of their project. Neither were they available for comment nor do they seem to have responded to concerns raised in the Georgian press. This leaves the future of Gudiashvili Square uncertain and forces everyone to speculate and assume worst-case scenarios.

What should city hall do? Is it even their business to meddle in private real estate projects? Shouldn’t entrepreneurs and investors know how to best use land or buildings? The short answer is yes, city hall should intervene and should restrict private investors.

Economic theory provides at least two justifications for the heavy involvement of city hall in real estate projects, in other words, active and interventionist city planning. One is that historic buildings and structures are a public good. While the owner enjoys some of the benefits of the building, others will too – passers-by, tourists, and citizens. Even better, one person’s enjoyment of the historic building does not diminish the enjoyment others derive from it. While the owner might capture some of the benefits accruing to others by charging entrance fees, or higher rents,  he will not be able to capture most of these benefits. This means that the social value of the building is higher than the value to the owner, who will probably underinvest in the maintenance from a society’s point of view. This gives a role to city hall.

The other justification is that real estate projects cause externalities. Suppose an investor destroys a historic building and replaces it with a new and unattractive structure. This would harm the owners of other buildings or businesses relying on tourists. All these costs imposed on others will be ignored by the investor, implying that there will be more than is socially optimal building projects. Again, this gives a role to city hall.