Optimal Land Use and the Allocation of Endogenous Amenities

This paper explores the implications, from a public sector economics point of view, of combining welfare assessments concerning land use in urban and environmental economics respectively. Urban economics has a long tradition in determining the optimal allocation of land (or space) as a consumption good, while land use issues in environmental economics are predominantly rooted in hedonic pricing as a valuation method for optimising the allocation of public goods. Recently, hedonic pricing methods have been extended by adopting location choice models for the valuation of non-marginal changes in levels of local amenities. Following a possible revision of the location choices by the population, endogenous prices are introduced and compensated for in a willingness to pay. Some of the new methods also allow for social interactions by means of endogenous amenities. While endogenous prices are the main contribution of these so-called sorting models to the valuation literature, until now little attention has been paid to the efficiency of the market equilibrium assumed, in terms of the consumption of space. This is surprising, because social interactions as endogenous amenities might alternatively be interpreted as positive external effects. As such, they are likely to result in an oversupply of land in a competitive market. The dominant characterisation of the equilibrium on the land (or housing) market in sorting models is market clearing, given a fixed supply. In this paper, the total amount of land used in the market clearing equilibrium will be compared with the competitive market equilibrium and the allocation by a benevolent social planner maximising social welfare. It is shown that under relatively general conditions and allowing for endogenous amenities, market clearing with a fixed supply will yield a total amount of land used that is smaller than in a competitive market, but larger than in the case of land use planning. This result suggests that in public policy recommendations, sorting models could benefit from complementing the valuation methodology with the internalisation of external effects for optimising land use.

Welfare Economic Aspects of Land Use Planning

This paper develops a unifying framework for spatial and environmental economics, based on equilibrium considerations for population games. The main contribution of this paper consists of introducing a consistent concept for spatial welfare. Following the introduction of estimable locational sorting models for valuation methods in environmental economics, the relationship between the theoretical underpinnings of the hedonic pricing model and the bid rent concept in urban economics is re-examined. This is done along the definition of the ideal general equilibrium willingness to pay (GE-WTP) that is at the heart of most applications of locational sorting models in environmental economics. A GE-WTP should be able to account for the value of non-marginal changes in a spatially explicit distribution of local public goods. Commonly, such a GE-WTP is derived as a Hicksian WTP adjusted for endogenous prices. Endogenous prices are typically enforced by a market clearing condition, often a fixed supply, constraining the relocation of a population in response to the changes in local quality. This paper offers an alternative interpretation of a GE-WTP. It demonstrates how for a discrete choice formulation, a fixed supply generically results in a Nash equilibrium in a population game. Furthermore, it is shown that this Nash equilibrium corresponds exactly to a spatial equilibrium in urban economics. This observation allows for a novel spatially explicit approach to the evaluation of land policy options, combining current cost-benefit practice with the optimization of land use. Finally it is shown, how the GE-WTP can be adjusted for developers' decisions, based on the analogy with urban economic models. It allows this spatial welfare measure to be extended with endogenous, instead of fixed, supply. This makes the concept also suitable for comparing the social welfare implications of entirely different land use patterns.

Welfare Economic Aspects of Land Use Planning

This paper develops a unifying framework for spatial and environmental economics, based on equilibrium considerations for population games. The main contribution of this paper consists of introducing a consistent concept for spatial welfare. Following the introduction of estimable locational sorting models for valuation methods in environmental economics, the relationship between the theoretical underpinnings of the hedonic pricing model and the bid rent concept in urban economics is re-examined. This is done along the definition of the ideal general equilibrium willingness to pay (GE-WTP) that is at the heart of most applications of locational sorting models in environmental economics. A GE-WTP should be able to account for the value of non-marginal changes in a spatially explicit distribution of local public goods. Commonly, such a GE-WTP is derived as a Hicksian WTP adjusted for endogenous prices. Endogenous prices are typically enforced by a market clearing condition, often a fixed supply, constraining the relocation of a population in response to the changes in local quality. This paper offers an alternative interpretation of a GE-WTP. It demonstrates how for a discrete choice formulation, a fixed supply generically results in a Nash equilibrium in a population game. Furthermore, it is shown that this Nash equilibrium corresponds exactly to a spatial equilibrium in urban economics. This observation allows for a novel spatially explicit approach to the evaluation of land policy options, combining current cost-benefit practice with the optimization of land use. Finally it is shown, how the GE-WTP can be adjusted for developers' decisions, based on the analogy with urban economic models. It allows this spatial welfare measure to be extended with endogenous, instead of fixed, supply. This makes the concept also suitable for comparing the social welfare implications of entirely different land use patterns

Towards the Measurement of Spatial Welfare

This paper develops a framework for assessing the welfare effects of the capitalisation of the value of environmental quality in the price for land, combining elements from environmental and spatial economics on the basis of equilibrium considerations for population games. Its main contribution to environmental economics consists of introducing a consistent concept for spatial welfare. Following the introduction of estimable locational sorting models in valuation methodology, the relationship between the theoretical underpinnings of the hedonic pricing model and the bid rent concept in urban economics is re-examined. This is done along the definition of a general equilibrium willingness to pay (GE-WTP) that is at the heart of most applications of locational sorting models in environmental economics. A GE-WTP should be able to value non-marginal changes in a spatially explicit distribution of local public goods. Commonly, such a GE-WTP is derived as a Hicksian WTP adjusted for endogenous land prices. This paper offers an alternative interpretation. For a GE-WTP, endogenous prices are typically enforced by a market clearing condition, often an exogenous supply. It is demonstrated how for a discrete choice formulation, a fixed supply per location results in a Nash equilibrium in bid rents. Furthermore, it is shown that this Nash equilibrium corresponds exactly to a spatial equilibrium in urban economics. In this stylised context a GE-WTP could be thought of as a measure for the dfference in social welfare between two spatial equilibria. As a money-metric measure, the GE-WTP could be translated to the difference in expenditures in which capitalisation is accounted for in quality-adjusted prices for land. These observations allow for a novel spatially explicit approach to the evaluation of land policy options, combining current cost-benefit practice with the optimisation of land use. Suggestions for operationalisation are put forward

Land Markets and Public Policy; An Act of Balance in Spatial Equilibrium

The organisation of human social and economic life is constrained by time as well as space. The spatial component does not only pose limitations in the form of distances, but can also offer possibilities for development as a result of favourable location characteristics. Some of the characteristics of a location are dictated by natural circumstances such as climate, altitude, and the presence of water and natural resources. Others result from human activity: agriculture, cities, roads, and ports. There often exists a clear dependency between the two parts, though sometimes human activity seems to overrule nature. With sufficient cultivation, agriculture can be situated in areas that do not have a favourable soil; some major cities are vulnerable to earthquakes or lie below sea level