ABSTRACT
This chapter describes the way individuals respond to a spatial externality when both optimal land values and bid-rents equal the shadow value of land. This proposition implies that the optimum under zero aversion becomes more compact relative to the corresponding equilibrium with externality. When the quality of the environment is endogenous, further to the spatial externality effect just described, spatial adjustments are also influenced by a land-value effect. The chapter shows that how cities adjust to a number of major spatial externalities. Since, for pollution from moving sources and congestion from stationary sources, the spatial externality effect and the land–value effect work in opposite directions, it is not possible to determine how optima must be spatially adjusted relative to the equilibrium. It is easy, within the institutional framework, to examine how robust these conclusions are for different specifications of a spatial externality. It is also possible to compare the effects of different spatial externalities.
