Tuesday, November 14, 2006 - 3:45 PM

Optimal Land Development with Endogenous Environmental Amenities.

JunJie Wu, Oregon State Univ, Dept of Ag. & Resource Economics, 200A Ballard Extension Hall, Corvallis, OR 97331

In this paper we analyze the dynamic interactions between human and natural systems in the context of land use and water quality. We consider the spatial pattern and time path of land development under a free market and a social planner.  Private development is shown to be more rapid and volatile to changes in economic conditions than the development that a social planner would carry out.  In some situation, the private development causes a crash where the ecosystem becomes completely degraded.  Unlike the free market case, a stable equilibrium with positive levels of amenities and land development exits in the social planner’s case.  The planner's time path and spatial pattern of land development can be implemented as a private development solution by impact fees.  Welfare can be improved by the creation of a riparian buffer.  This policy, however, does not achieve the first-best efficiency of the planner solution.  These results suggest that explicit consideration of spatial and temporal dimensions of land use is critical for understanding the coupled linkages between human and natural systems.  Ignoring these dimensions can lead to shortsighted decisions and behaviors that minimally will lead to inefficient land use and in the extreme, a crash of ecological systems.  Incorporating these dimensions into the analysis can help direct policies that avoid such potentially catastrophic outcomes and result in higher levels of both social welfare and environmental quality.