Chapter 11

Land

Buy land, they're not making it anymore”

Mark Twain (American Humorist)

A land ethic ... reflects the existence of an ecological conscience, and this is turn reflects a conviction of individual responsibility for the health of the land. Health is the capacity of the land for self-renewal. Conservation is our effort to understand and preserve this capacity."

Aldo Leopold (Sand County Almanac)

Introduction

Land occupies a special niche, not only in the marketplace, but also deep in the human soul. In its role as a resource land has special characteristics that affect its allocation. Topography matters, of course, but so does its location, especially since, in contrast to many other resources, land's location is fixed. It matters not only absolutely in the sense that the land’s location directly affects its value, but also relatively in the sense that the value of any particular piece of land is also affected by the uses of the land around it. In addition land supplies many services, including providing habitat for all terrestrial creatures, not merely humans.

Some contiguous uses of land are compatible with each other, but others are not. In the case of incompatibility uses conflicts must be resolved. Whenever the prevailing legal system treats land as private property, as is the case in the United States, the market is one arena within which those conflicts are resolved.

How well does the market do? Are the land use outcomes and transactions efficient and sustainable? Do they reflect the deeper values people hold for land? Why or why not?

In this chapter we will begin to investigate these questions. How does the market allocate land? How well do market allocations fulfill our social criteria? Where divergences between market and socially desirable outcomes occur, what policy instruments are available to address the problems? How effective are they? Can they restore conformance between goals and outcomes?

The Economics of Land Allocation

Land Use. In general, as with other resources, markets tend to allocate land to its highest valued use. Consider Figure 11.1, which graphs three hypothetical land uses—residential development, agriculture and wilderness[1]. The left-hand side of the horizontal axis represents the location of the marketplace where agricultural produce is sold. Moving to the right on that axis reflects an increasing distance away from the market.

The vertical axis represents net benefits per acre. Each of the three functions, known in the literature as bid rent functions, records the relationship between distance to the center of the town or urban area and the net benefits per acre received from each type of land use. A bid rent function conveys the maximum net benefit per acre that could be achieved by that land use as a function of the distance from the center. All three functions are downward sloping because the increased cost of transporting both goods and people lowers net benefits per acre more for distant locations.

Figure 11.1 The Allocation of Land

. In general, as with other resources, markets tend to allocate land to its highest valued use. According to this Figure, a market process that allocates land to its highest valued use would allocate the land closest to the center of the city or town to residential development (a distance of A), agriculture would claim the land with the next best access (A to B), and the land farthest away from the market would remain wilderness (from B to C). This allocation maximizes the net benefits society receives from the land. Although very simple, this model also helps to clarify both the processes by which land uses change over time and the extent to which market processes are efficient , subjects we explore in the next two sections.

Land Use Conversion. Conversion from one land use to another can occur whenever the underlying bid rent functions shift. Conversion of agricultural land to residential development could occur due when the bid rent function for residential development shifts up, the bid rent function for agriculture shifts down, or any combination of the two.

As demonstrated in the next Chapter more than 50% of the agricultural cropland in the United States has been converted to nonagricultural purposes since 1920. Two sources of this conversion stand out. First, an increasing urbanization and industrialization of society rapidly shifted upward the bid rent functions for nonagricultural land, including residential development. Second, rising productivity of the remaining land allowed the smaller amount of land to produce a lot more food. Less agricultural land was needed to meet the rising food demand.

Many developing countries are witnessing the conversion of wilderness areas into agriculture.[2] Relative increases (shifts up) in the bid rent function for agriculture could result from:

Domestic population growth that increases the domestic demand for food.

Opening of export markets for agriculture that increase the foreign demand for local crops.

Shifting from subsistence crops to cash crops (such as coffee or cocoa) for exports, thereby increasing the profit per acre.

New planting or harvesting technologies that lower the cost and increase the profitability of farming.

Lower agricultural transport costs due, for example, to the building of new roads into forested land.

Some increases in the bid rent function for wilderness could result from an increasing demand for wilderness-based recreation or increases in preferences for wilderness due to increases in public knowledge about the many functions wilderness performs.

Although only three land uses are drawn in Figure 11.1 for simplicity, in actual land markets, of course, all other uses, including commercial and industrial, must be added to the mix as well. Changes in the bid rent functions for any of these uses could trigger conversions.

Sources of Inefficient Use and Conversion

In the absence of any government regulation are market allocations of land efficient? In some circumstances they are, but certainly not all, or even most, circumstances.

We shall consider four sets of problems associated with land use inefficiencies that commonly arise in the industrialized countries; sprawl and leapfrogging, the effects of taxes on land use conversion, incompatible land uses, undervalaution of environmental amenties and market power. While some of these may also plague developing countries , we follow with a section that looks specifically at some special problems developing countries face.

Sprawl and Leapfrogging

Two of the problems associated with land use that are receiving a lot of current attention are sprawl and leapfrogging. From an economic point of view sprawl occurs when land uses in a particular area are inefficiently dispersed, rather than efficiently concentrated. The related problem of leapfrogging refers to a situation in which new development continues not on the very edge of the current development, but further out. Thus developer's "leapfrog" over contiguous, perhaps even vacant, land in favor of land that is further from the center of economic activity.

Several environmental problems are intensified with dispersed development. Trips to town to work, shop or engage in leisure activities become longer. Longer trips not only mean more energy consumed, but frequently they also imply a change from the least polluting modes of travel (such as biking or walking) to automobiles, a much more heavily polluting source. Assuming the autos used for commuting are fueled by gasoline, internal combustion engines, dispersal drives up the demand for oil (including imported oil), results in higher air pollutant emissions levels (including greenhouse gases) and increases the need for more steel, glass, and other raw materials to supply the increase in the number of vehicles demanded.

The Public Infrastructure Problem To understand why inefficient levels of sprawl and leapfrogging might be occurring we need to examaine the incentives faced by developers and how those incentives affect locational choices.One set of inefficient incentives can be found in the pricing of public services. New development beyond the reach of current public sewer and water systems may necessitate extending those facilities if the new development is to be served. The question is “who pays for this extension? ”.

If the developer pays for the extension, s/he will automatically consider this as part of the cost of locating further out. When those costs are passed on to the buyers of the newly developed properties, they will also consider the marginal cost of living further out.

Suppose, however, as is commonly the case, the extensions of these services are financed by metropolitan-wide taxes. When the development costs are being subsidized by all taxpayers in the metropolitan area, both the developers and potential buyers of the newly developed property find living further out to be artificially cheap. This bias prevents developers from efficiently considering the trade-off between developing the land more densely within the currently served areas and developing land outside those areas, thereby promoting inefficient levels of sprawl. By lowering the cost of developing further out it also increases the likelihood of leapfrogging.

The desirability of development further from the center of economic activity can also be promoted either by transportation subsidies or negative externalities. As potential residential buyers choose where to live, transportation costs matter. Living further out may mean a longer commute or longer shopping trips. Implicitly, when living further out means more trips and/or longer trips, these transport costs should figure into the decision of where to live; higher transportation costs promote the relative net benefits of living closer to the center.

The implication is that if transportation costs are inefficiently low due either to subsidies or any negative externalities from travel that have not been internalized, a bias will be created that inefficiently favors more distant locations. Finding examples of inefficiently low transportation costs is not difficult. While we reserve a full discussion of this topic for the mobile source pollution chapter, for our current purpose consider just two examples; pollution externalities and parking subsidies.

  • When the social cost associated with pollution from car exhaust is not fully internalized, the marginal cost of driving an extra mile is inefficiently low. This implies not only that an excessive number of miles will be driven, but also that dispersed development has become inefficiently attractive.
  • Many employers provide free parking for their employees even though providing that parking is certainly not free to the employer. Free parking represents a subsidy to the user and lowers the cost of driving to work. Since commuting costs are typically an important portion of total local transportation costs, free parking creates a bias toward more remote residential developments and encourages both sprawl.

While these factors certainly promote sprawl and make leapfrogging more likely, they don't completely explain why developers skip over land that is closer in. Economic analsyis explains some sources of leapfrogging. (Burchfield et al. 2006) The first explanation notes that when residential dwellers place a sufficently large amenity value on public open space, they may be willing to incur the additional commuting costs associated with leapfrogging in order to take advantage of the larger amount of open space that is available further out. Developers can supply more public open space in these areas since land is cheaper.

Another explanation for leapfrogging suggests that by locating outside of the municipal boundaries, (and skipping over land that is at the edge of, but still within those boundaries), developers may be able to avoid the costs associated with extending municipal services all together. New development in these remote areas can be accommodated simply by drilling wells and by installing septic systems on each building lot.

How big of a problem is sprawl? Some researchers have tried to answer that question with the aid of geographic information systems (GIS). Example 11.1 presents their answers.

Incompatible Land Uses

As mentioned earlier in this chapter, the value of a parcel of land will be affected not only by its location, but also how the near by land is used. This interdependence can be another source of inefficiency.

We know from previous discussions in this book that even in the presence of fully defined property rights, private incentives and social incentives can diverge in the presence of externalities. When any decision conveys external costs on another party, the allocation that maximizes net benefits for the decision-maker may not be the allocation that maximizes net benefits for society as a whole.

Negative externalities are rather common in land transactions. Many of the costs associated with a particular land use may not accrue exclusively to the landowner, but will fall on the owner of near-by parcels. For example houses near the airport are affected by the noise and neighborhoods near a toxic waste facility may face higher health risks.

One current controversial current example involves an ongoing battle over the location of large industrial farms where hogs are raised for slaughter. Some of the costs of these farms, odors and water pollution from animal waste for example, fall on the neighbors. Since these costs are externalized, they tend to be ignored or undervalued by lhog farm owrners in decisions about the land, creating a bias. In terms of Figure 11.1 the private net benefit curve for agriculture would lie above the social net benefit curve, resulting in an inefficiently high allocation of land to agriculture (hog farms in this example).[3]

Example Box 11.1 Using GIS to Analyze Sprawl

As outlined in Chapter 3, geographic information systems (GIS) offers economists and others powerful tools for analyzing spatial data and spatial relationships.

In a 2006 article entitled, “Causes of Sprawl: A Portrait from Space,” Burchfield et al. use GIS technology to examine urban development in the United States. They try to determine the extent of sprawl in U.S. cities. They also investigate why some cities are more sprawling than others.

In order to examine these questions, they created a data set that combines high-altitude photographs from 1976 with satellite images from 1992. The also utilized digital land cover and land use data from the same two time periods. In order to calculate sprawl they first calculated the percentage of open space within a square kilometer of the development. They then calculated an index of sprawl by averaging across all the residential development in each of the metropolitan areas in the study. Atlanta, for example, has a 1992 sprawl index of 55.57 while San Francisco’s is 30.48. San Francisco is a more compact city than Atlanta whose development is more scattered.

They find that two-thirds of the land area in the U.S. that was developed by 1992 was also developed in 1976. Only .3 percent of the 1992 residential development was found to be more than 1 kilometer away from other development, but 43 percent of the square kilometer surrounding this average development is undeveloped. They conclude that while overall there has been an increase in development, it was not determined to be any more sprawling than before. In fact, the extent of sprawl is very stable over the time periods they analyze.

They then test some predictions about the causes of sprawl by regressing their sprawl index for new development on some of the metropolitan area’s characteristics.

Not surprisingly, sprawl does vary by city. Geography, access to natural resources like water and access to infrastructure are all determinants of sprawl. Rates of population growth and reliance on an automobile are also determinants. Interestingly, they find that 25% of the variation in sprawl across the cities they studied can be explained by physical geography alone. The presence of groundwater aquifers, for example, allows housing to be more scattered since homeowners can drill inexpensive wells without the additional cost of municipal water lines. Mountains tend to contain development, but small hills encourage expansion. A temperate climate will also increase sprawl. Does the geography and climate in your hometown encourage or discourage sprawl?

GIS technology allows us to combine all the features of the landscape including the human dimension. This technology can aid the researcher who hopes to ask more probing questions about spatial dimensions of environmental economics including topics like sprawl.

Source: Marcy Burchfield, Henry Burchfield, Diego Puga and Matthew Turner, “Causes of Sprawl: A Portrait from Space,” Quarterly Journal of Economics, May 2006.