Land Use

Question 1

Discuss the market failures of Land Use

Answer 1

Inappropriate government intervention
Imperfect competition (market power)
Positive externality
Negative externality

Question 2

What is Land Use Conversion?

Answer 2

Conversion occurs whenever the underlying bid rent functions shift.

Question 3

Provide Examples of Land Use Conversion

Answer 3

• Increasing urbanization, industrialization, population growth may shift residential development bid rent function upwards;
• Rising productivity and increasing demand or profitability of agricultural land may shift agricultural bid rent function upwards;
• Increasing demand for wilderness-based recreation may shift the wilderness bid rent function upwards.

Question 4

Differentiate between Land Use positive and negative externalities

Answer 4

Positive externality
benefits provided by land use accrue to others (activity creates benefits for others or to the society)
Negative externality
impact on nearby land use (activity on land leads to costs or losses to nearby land owners)

Question 5

Outline and provide examples of the Land Use market failure of Inappropriate government intervention

Answer 5

• Policies may lead to the inefficient conversation of land use
• put in place to achieve some other objective but in doing so they have an adverse impact on land use conversion.
• Agricultural subsidies
• Land or property tax
• Inappropriate charges (development and infrastructure charge)

Question 6

Why might agricultural subsidies result in inefficient outcomes?

Answer 6

Agricultural subsidies will make agricultural activity more attractive relative to other land use by increasing the return on agricultral land.
Subsidies have an impact equivalent to shift the bid-rent function for agricultural land upwards.
This may result in more land being converted from conservation than is efficient.

Question 7

What environmental problems are agricultural subsidies linked to?

Answer 7

Impact on ecosystem health
Species loss
Biodiversity loss
Negative externalities (fertiliser run off, pesticides, insecticides)
Soil erosion

Question 8

What is the land tax based on?

Answer 8

value of the land.

The land value is determined by either the sales price (actual market value) or an assessor (perceived market value).

Question 9

What is the origin/basis of the land tax?

Answer 9

Economic activity increases the market value of land nearby.
These activities (the society) create positive externalities for those who own land nearby.
The land value tax aims to recover this value created by society.
The land value tax is based on the notion that value created by community belongs to community whereas value created by individuals belongs to individuals.

Question 10

What does the land tax reflect? What does this reflection potentially lead to?

Answer 10

Land tax does not only reflect the value of the current use of the land but also the potential use and the value of the nearby activity.
The tax may increase the rate of land use conversion i.e. if development pressure may raise tax value on farmers because of land potential

Question 11

What are the main problems with converting land to residential development?

Answer 11

Extension of services: water, sewage, electricity, gas, telephone, etc. This incur development charges.
Road and public transport: bus or train lines, freeways, etc. These incurr Transport infrastructure charges

Question 12

What does the ‘Allocation of Land’ graph show? What is the priority of land allocation?

Answer 12

How the different bid rent functions varies at different distances to the centre of urban area due to the change in the maximum net benefit (per acre).
Residential, agriculture and wilderness

Question 13

What was Henry Georges land tax idea?

Answer 13

If an individual creates a benefit for society, it belongs to him. If society creates a benefit for a individual, it belongs to the society.

Question 14

Explain the land use market failure of imperfect competition? What is the practice linked to this?

Answer 14

Government’s can become ‘monopolist sellers’ as they are able to deem land as in need of conversion due to some public benefit or their objectives and therefore makes the assumption that public benefits are higher than the sum of individual costs. This practice is known as compulsory acquisition. Gov’s compensation for the land may not reflect owners private valuation.

Question 15

What are the pro’s and cons of compensation?

Answer 15

Pros:
Will force governments to regulate only when it is efficient to do so (social benefits outweigh the private costs)
Unfair for an individual to bear substantial private costs when there benefits for society.

Cons:
Governments may regulate less than optimal due to budget constraints
If land value increases due to regulation than landowner is not expected to pay to government

Question 16

What is compulsory acquisiton?

Answer 16

The government purchases private land for public purpose in return of compensation.
The ‘fair’ level of compensation is determined by an assessor based on comparable sales and specific characteristics of the land but may not reflect the land owner’s private valuation.

Question 17

Describe the market failure of positive externalities in land use

Answer 17

There may be benefits that are not accrued to the landholder.
The benefits associated with the bid rent function are underestimated. The social benefits of a land may be higher than the private benefits experienced by the landowner.
This leads to the problem where the purchase of the land is based on the use value and not the positive externalities?

Question 18

What is a safe harbour agreement?

Answer 18

Safe Harbor agreements guarantee that no restrictions will be added due to increased conservation efforts (i.e. landowners responsibilities are “frozen” at levels prior to entering into the agreement).
The presence of an endangered species may result in restrictions imposed on activities on the land.
The landowners are therefore not interested in restoring wildlife habitat as they may find themselves facing increased restrictions.

Question 19

What is a conservastion easement / covenant?

Answer 19

legal agreement between a landowner and private or public agency that limits uses of the land in order to protect its conservation values.
The conservation easement allows a bundle of rights associated with land ownership to be separated and to individually flow to the highest value use.
Allows land to be preserved much more cheaply as purchase of land is not required but only the easements

Question 20

Conservation Auction?

Answer 20

Most often input based contract, biodiversity is created over time.
What is purchased is not the biodiversity directly but a contract that delivers biodiversity during the contract term (over time).

Question 21

What is the cooperation of a conservation auction?

Answer 21

Asymmetric information problem
landholders – know the cost
environmental experts – know the environmental value

Question 22

What is a negative externality of land use?

Answer 22

impact on nearby land
The value of a land may be affected by the way the neighboring land is used.
Certain land uses can create negative externalities to neighboring land (e.g. smell, noise, shadow, increased traffic)
The presence of negative externalities mean that the benefits in the bid rent function are overestimated
i.e. social benefits are lower than private benefits.

Question 23

Offset schemes? Who are the buyers and who are the sellers?

Answer 23

Governments require those impacting on ecosystems/vegetation/species to create or pay for an ‘equivalent’ offset.
Buyers: usually developers and the government (e.g. for road construction, infrastructure development)
Sellers: usually landholders or NGOs who revegetate or improve the current condition on their land (beyond current duty of care)

Question 24

What are the key criteria that differentiate offset schemes from one another?

Answer 24

Whether offsets are created before or after the clearing/impact takes place
How strong ‘equivalency criteria’ is used (e.g. area only or other ecosystem characteristics)
How incentives of those creating offsets are aligned with the policy objective
How risk is shared by the participants.

Question 25

What are transferable development rights? What are the two area types?

Answer 25

One area is set aside for conservation and landowners require compensation. Another area is freed up for development and the land value has increased.
Sending areas: areas where development is prohibited or discouraged. Landowners in sending areas are allocated development rights (e.g. based on the number of developable areas)
Receiving areas: areas where development is encouraged. Landowners in receiving areas must buy certain number of rights from selling areas.

Question 26

What are the pros cons of TDRs?

Answer 26

Advantages
Landowners in selling areas receive compensation that they feel is reasonable (else they would not sell their permit)
No budget burden for government.
Disadvantages
Could be difficult to administer.
Further trading rules are required to ensure that compensation and payments are fair

Question 27

What is zoning?

Answer 27

Zoning creates districts (zones) that establish permitted uses.
People who opt to live in a specific area can ‘calculate’ with the negative externalities that are typical for those zones.
For example, there are typically residential, commercial, industrial zones with different activities allowed at different times of the day.