Week 11: Land Use, Conservation and Biodiversity

Question 1

How do we allocate land?

Graph?

Answer 1

Land allocation tends to occur based on the highest value use (maximum net benefit)

Question 2

What are the market failures present in land?

Answer 2

Inappropriate government intervention

Imperfect competition

Positive externality

Question 3

Why is inappropriate government intervention a market failure for land?

Answer 3

Support a private or economic objective (not land conservation) à adverse impact on land conservation.

Examples include:

• Agricultural subsidies
• Land tax
• Inappropriate charges (development and infrastructure charges).

Question 4

How do agricultural subsidies work?

What is the impact on the allocation?

Answer 4

• Increase the net benefit from agriculture à shifts upwards
• Impact on the environment: movement away from the wilderness, impact ecosystem, species loss, biodiversity loss.
• If negative externalities were included, this would lower net benefit.

Policy: to ‘correct’ the bid rent function, and achieve an efficient level of conversion we:

• Eliminate subsidies

And account for the negative externalities of agriculture.

Question 5

How does a land value tax work?

Why does it exist?

Are there any perverse outcomes?

Answer 5

Decrease the net benefit of land for residential or agriculture use.

• The amount of tax is determined by actual or perceived market value. Is a percentage of this (0.25% to 2.25%)
• Rational: market value of land is derrived from positive externalities (e.g. business and aspects of society) à thus a proportion of this should be returned to society.

Value of the potential use of the land.

For example: If higher land tax, due to high developmental potential of surrounding land à could make land tax prohibitively expensive, and push up agriculture bid rent function.

Question 6

How do taxes on property transactions work?

(stamp duty)

Why is it inefficient?

Answer 6

Charged when property changes owernship à portion of sale price

Why is is inefficient?

• Increase cost of moving (resident or busienss)
• Decreases labour mobility
• Increase commuting
• Prevent efficient up-sizing or down-sizing of property across the population.

This is where government recieves a lot of revenue.

• Thus government has incentive for residential development that changes frequently and is high value (i.e high property prices).

The tax is ‘sticky’ as land is ‘immobile’ thus tp cannot relocated to lower tax burden area, to avoid stamp duty.

Question 7

What are inappropriate set charges?

Answer 7

When converting from wilderness, or agriculture to residential à certain costs are incurred.

• E.g. extension of services (water, sewage, electricity, gas, telephone)
• Extention of roads
• Extention of ammendities, stormwater management, parks and communitiy facilities

3 ways of paying for this expansion

• General public
• User

Beneficiary pays

Question 8

What are the repercussions of the general public paying for the costs?

Answer 8

General taxes

• i.e. cost incurred by all, even if they do not benefit.

Per capita cost of living in ‘low density’ locations is typically higher than ‘high density’

• Decision to live in ‘low density’ is not based on true cost of living.
• Benefit is higher than it should be as it is subsidised by general public.
  
  • Don’t face the ture cost.

Consequence: Urban sprawl

Question 9

What is a user pay model for providing for these costs?

Answer 9

Development impact fee or development levies:

• Payments from a property developer to contribute to the shared infrastucture and services in the area surrounding their development.
• E.g. paying for capital costs of existing facilities, cost of delivering the new service (extended pipelines), additional water treatment.

A situation where developers will pay the charge, pass it onto users and thus users incur the cost of extending.

Question 10

What is a transport charge?

How does it work?

Are there any perverse outcomes?

Answer 10

General public pays for the provision of transport infrastructure.

• Can promote higher commuting as individauls are not charged the true cost of providing the transport.
• Property prices rise following transport infrastructure, after development.
  
  • Distributional impacts (benefits, paid for by others)
    
    • Land value tax.
• Taxing those who use the infrastructure may not be sufficient:

As those who benefit from higher property prices, but don’t take public transport will still receive a benefit without paying for it.

Question 11

What is a betterment levy?

Why is it a beneficiary pay model?

Answer 11

Aim to capture a portion of estimated land value increase, as a result of infrastructure investment.

Quantifying the benefits (estimated increase in property value).

The beneficiary, as it taxes the benefits received.

Question 12

How does imperfect competition become a market failure in land?

Answer 12

Government need to convert some land for private use (roads, train lines, public parks)

• Assumed: public benefit> private benefit
• The seller of the land is a ‘monpolist seller’ could hold out and extract rent.

Overcame this through compulsory acqusition:

• Acquired land for a ‘fair’ level of compensation

No sentimental valuation

Question 13

How do positive externalities exist in the land allocation market?

Answer 13

Possible positive externalities for society. Not accrued by the landholder

e.g.

Question 14

Policy: Safe Harbour Agreements

Answer 14

Higher restrictions on land habitats for endangered species, could be a disincentive for landowners to convert land to ‘wildlife’ as costs increase.

Safe Harbor means no restrictions will be added when increasing conservation efforts.

Question 15

Policy: Conservation Easements (Covenants)

Answer 15

Agreements where landholders will receive a payment to limit the use of the land to protect its conservation values.

‘unbundling’ of conservation ‘rights’

• From rights associated with land ownership

Conservation activities can be carried out cheaply, as you don’t need to purchase the entire land.

Question 16

Policy: Biodiversity/Conservation Auctions:

Answer 16

Government purchases ‘biodiversity’

• Agreements where landowner is paid to ‘produce’ biodiversity
• Primiarly input based contracts à how much did you spend improving biodiversity (rather than the actual improvement of biodiversity).

Acutioning of these contracts:

• Landowners bid:
  
  • Taking into account the opp cost of the contract (either using the land for alternative purposes)
• Government receives bids
  
  • Evaluates based on bid price and biodiversity value.

Example: BushTender – Victoria:

• Landholders will submit ‘sealed bids’ (reflect cost to create the ‘biodiversity’)
• Successful bids will be those that offer the ‘best value for money’
  
  • This is based on a ‘biodiversity’ index.

Created win-win, government achieved objective, at cost, landowners established their ‘own price’

Question 17

Policy: Offset schemes

Answer 17

The government required a payment of an ‘equivalent’ offset based on impact on ecosystems/vegetation/ species.

Buyer: developers and the government (construct infrastructure)

Seller: NGO revegetates or improves the current condition

Example: Wetlands Banking:

• Third party will create ‘mitigation credits’ undertaking mitgation activities (under an agrement with the relevant government agency)
• When on-site damage is unavoidable, must purchase ‘mitigation credits’ to compensate for the value lost, to create value elsewhere.

Example: Conservation Banking

Same as above

Question 18

Policy: Transferable Development Rights

Answer 18

A restriction is placed on land to ‘set it aside for conservation’

• Land owners must be compensationed for the loss in value.

Creting property rights around being able to develop the area.

• Areas that are prohibited receive permits to develop land, then will send these to areas where development is encouraged.

Advantage:

• Landowner is selling to receive their compesation, that they feel is reasonable.
• No budget burden for government.

Disadvantage:

• Difficult to administer

Trading rules are required to ensure compensation and payment are fair.

Question 19

What impact does an increase in population have on the bid rent function

Answer 19

• Population growth increases the demand for housing at all locations.
• Note, that this is not necessarily the case, it may disproportionately impact areas that are closer/further away from city centre.
• The increase in housing demand leads the residential property developer to bid more for land at all locations, the price of housing increases.
• Bid rent function for residential development shifts up.
• The urban area expands.
• Land used for agriculture is converted to residential development at the urban fringe.
• The urban/rural boundary shifts from 16.6 to 22 kilometres.

Question 20

What impact will a decrease in commuting costs have on the bid rent function?

e.g. subsidised public transport

Answer 20

• A decline in commuting costs give the bid rent function a flatter slope.
• The subsidy reduces the costs and thus increases the net benefit from land that is further away.
• The further away is the area from the city centre, the greater benefits the subsidies provide (relative to the ‘no subsidy’ scenario).
• If households are willing to pay more for housing farther away, then residential property developers will be willing to pay more for land at these locations.
• The urban area expands by developers buying up farms at the urban fringe.
• The urban/rural boundary shifts out.

Question 21

Increase in food prices –> bid rent function?

Answer 21

• Bid rent function for agriculture shifts up.
• Many residential households at the edge of the urban area may be forced to make higher bids for housing than before.
• The new boundary between the urban area and the agricultural has moved closer to the city centre.
• The new boundary between the agricultural area and wilderness has moved farther away from the centre.

Question 22

increase in pollution close to the city centre

Answer 22

• The pollution makes living near the city centre less attractive and these externalities dissipate with distance.
• Note that in this model we assumed that there are concurrently lower bids close to city centre and higher bids farther away from city centre.
• Two advantages from moving farther away: Distant sites have lower prices for housing and they have lower levels of pollution.
• Households are willing to pay more for housing farther away from the city centre and less for sites near the city centre.
• The urban/agricultural boundary expands to the right as households move away from the source of the pollution.
• We have a more decentralized urban area than before.

Question 23

Urban growth boundary (UGB) 15km

Answer 23

• The new UGB between the urban area and the agricultural has been set at 15km and is now closer to the city centre than before.
• Demand for housing within the UGB increases.
• Those that lived outside the UGB will increase the demand for housing within the UGB.
• Population density increases at the city centre.
• Farmers can occupy the land, urban/agricultural boundary moves closer to the city centre.