The New York Post reports that Little Italy in Manhattan is shrinking as Chinatown expands.  The New York Times reports that Spike Lee is upset that African-American communities in Brooklyn are shrinking as "Girls" (white yuppies) move in.   What do urban economists think?  Scarce land is allocated to the highest bidder. Unless there is an externality, why doesn't this private valuation reflect the highest and best use of this land?   If you say that there is an externality that the historical character of the area should be preserved, this may be a fair point but a critic might ask "why?'".    Why can't neighborhoods change?  If you say that the renters who live there planted roots there and now can't afford to live there then you are making a valid point but you are saying that they have the property rights to an asset they didn't own.   That's  a dangerous precedent that borders on socialism.

So, to be fair and to be clear, I do see that there is a co-ordination problem that people who lived as renters for years in a community have revealed that they want to live there and they have developed roots there. If gentrification takes place and these individuals are displaced, they face a co-ordination issue of where they can regroup in a newly affordable community.  This transition takes time and resources and this is the cost that this group bears due to gentrification. Such transition dynamics have not been studied enough by urban economists because we haven't spent enough time thinking about endogenous social networks. Instead, we assume perfect competition, zero migration costs and a complete attribute space such that if Brooklyn becomes unaffordable that a household can costlessly move to a close Brooklyn substitute and continue to live his life.

An even more interesting issue here relates to urban politics. The political leaders in the gentrifying area were elected by the original group. Such self interested leaders will be aware that the new entrants may not support the leader and may eventually elect their own leader. This means that the incumbent political leader in a gentrifying area has strong incentives to rally around Spike Lee and "fight the power".  If the incumbent residents who are being priced out anticipate that political leaders will back their protests then this helps to solve their free rider problems and this group will gather and march and hope that the New York Times shows up to cover the rally, this in turn leads to Progressive Bill De Blasio to show up.  So, note the social dynamic here that is triggered and is self re-enforcing.   Randy Walsh and I discuss some of these issues in our new Handbook of Urban Economics chapter that I will blog about soon.