ABSTRACT
Introduction At the heart of most discussions or debates about land use are two basic questions: (1) how are land-use decisions made, and (2) how should land be used? The first question concerns the study of the factors that determine the choice among alternative uses and how changes in those factors are likely to affect land-use decisions. This lies within the realm of what economists generally term ‘positive’ analysis. The second question involves ‘normative’ analysis, or a comparison and judgment regarding alternative decisions or outcomes. It requires the designation of some criteria for determining which land-use decisions or patterns are somehow more desirable. From an economic perspective, the criterion that is most often used is economic efficiency. Under this criterion, the second question asks what configuration of land uses ensures that land is used in a way that maximizes the aggregate social net benefits that are reaped from the land resource. In the absence of market failures, private land-use decisions are expected to be socially efficient, i.e., to maximize the net social return from use of the land. However, in reality many land-use decisions involve market failure. In particular, they can generate external costs or benefits, i.e., costs or benefits that are not borne by the private parties making the land-use decisions. For example, use of land for agricultural production can generate external costs from the use of fertilizers and pesticides (e.g. causing water pollution) or from the odors associated with certain production activities (e.g., hog farms). On the other hand, agricultural use of land also generates open space amenity benefits for surrounding communities. In such cases, the private net return from a given land use differs from the social net return, and private land allocation decisions will not necessarily be socially efficient. There is an extensive body of theoretical and empirical literature on both the positive and normative aspects of land-use decisions. Our intention in this chapter is not to provide a comprehensive review of that literature. For this, we refer the reader to a bibliography compiled by Plantinga (1999). Rather, our purpose is to provide an overview of the economic analysis of land-use decisions. Using a very simple model of the private land allocation decision, we illustrate some basic principles that underlie nearly all economic models of land
80 Economics of Rural Land-Use Change use (both positive and normative).1We then use the basic principles embodied in this simple model to discuss more complex scenarios in which optimal private allocation decisions are affected by a number of factors. In particular, we consider (1) the role of land characteristics such as land quality, (2) intertemporal or dynamic influences stemming from the existence of stock effects or changes in returns over time, (3) the impact of uncertainty about returns stemming, for example, from uncertainty about future demand for certain goods or services, and (4) the importance of the location of land, such as its proximity to markets or cities or to other related land uses. Each of these extensions introduces an additional consideration in the optimal private allocation decisions (which often complicates the theoretical modeling), but the qualitative nature of that decision remains unchanged. We emphasize this common underlying structure throughout the chapter. This common structure, as will be explained at the end of the chapter, serves as the conceptual basis of economic analyses of land-use change, and policies that preclude or stimulate such changes. We also emphasize the applicability of this common structure to a wide range of land-use contexts. It applies to any land allocation context, whether it be an allocation between agricultural and non-agricultural land (e.g., forestland), developed and undeveloped land, residential and urban or agricultural land, cropland and pastureland, or even land in corn and land in soybeans. In addition, this basic model applies equally to land-use decisions in production (e.g., allocating land as an input to multiple agricultural outputs) and consumption (e.g., allocating land to residential uses based on preferences). In all of these cases, the underlying principles are the same. To highlight this, we illustrate the basic principles using a variety of contexts that offer specific examples of decisions regarding different types of land uses in both production and consumption cases. Lastly, this structure is extended to consider socially optimal land allocation decisions. In particular, we consider how externalities result in disparities between private and social returns from land and how such disparities, in turn, distinguish optimal private land allocation decisions from socially optimal land allocation decisions. This extension provides the foundation for out discussion of public policy instruments such as taxes, subsidies, zoning regulations, and conservation easements. The modeling structure is further adapted to highlight the potential of these public policy instruments to align private and social returns. The chapter is organized as follows. We begin with an overview of the positive analysis of land-use decisions. As noted above, we first present the simplest model of a private land allocation decision and then extend the model to incorporate additional considerations. We then turn to the normative issues that arise from land-use externalities. Again drawing on the simplest land allocation model, we briefly review the nature of the resulting inefficiency. We then discuss policies that can be used to correct the associated allocation distortions.
