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Welfare Economic Aspects of Land Use Planning

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  • Wilbert Grevers

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  • Anne Van der Veen

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    Abstract

    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.

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    Bibliographic Info

    Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa05p386.

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    Date of creation: Aug 2005
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    Handle: RePEc:wiw:wiwrsa:ersa05p386

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    1. Feenstra, Robert C, 1995. "Exact Hedonic Price Indexes," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 634-53, November.
    2. Kerry Smith, V. & Sieg, Holger & Spencer Banzhaf, H. & Walsh, Randall P., 2004. "General equilibrium benefits for environmental improvements: projected ozone reductions under EPA's Prospective Analysis for the Los Angeles air basin," Journal of Environmental Economics and Management, Elsevier, vol. 47(3), pages 559-584, May.
    3. Dasgupta, Partha & M Ler, Karl-G Ran, 2000. "Net national product, wealth, and social well-being," Environment and Development Economics, Cambridge University Press, vol. 5(01), pages 69-93, February.
    4. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, December.
    5. Dennis Epple & Holger Sieg, 1999. "Estimating Equilibrium Models of Local Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 645-681, August.
    6. Nancy E. Bockstael, 1996. "Modeling Economics and Ecology: The Importance of a Spatial Perspective," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(5), pages 1168-1180.
    7. Scotchmer, Suzanne, 1986. "The short-run and long-run benefits of environmental improvement," Journal of Public Economics, Elsevier, vol. 30(1), pages 61-81, June.
    8. William A. Brock & Steven N. Durlauf, 2003. "Multinomial Choice with Social Interactions," NBER Technical Working Papers 0288, National Bureau of Economic Research, Inc.
    9. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    10. Patrick Bayer & Robert McMillan & Kim Rueben, 2003. "An Equilibrium Model of Sorting in an Urban Housing Market: A Study of the Causes and Consequences of Residential Segregation," Working Papers 03-01, Center for Economic Studies, U.S. Census Bureau.
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    Cited by:
    1. Wilbert Grevers & Anne Veen Van Der, 2006. "Optimal Land Use and the Allocation of Endogenous Amenities," ERSA conference papers ersa06p522, European Regional Science Association.

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