Optimal Allocation of Land for Conservation: A General Equilibrium Analysis

This paper presents a general equilibrium analysis of the optimal allocation of land to be preserved as natural habitat for conservation and recreation. Following Anas (1988) we model the natural habitat as both a congestible public good due to recreation visits and a pure public good due to option and existence values. Following Fullerton and Kinnaman (1995) we analyze the use of tax instruments to achieve the first best outcome in a private competitive market. First we present the scenario where the public good, the environment, is provided by a government or conservation agency. We show that a per unit lump sum tax on the environment similar to Anas (1988) combined with a recreation tax or a wage subsidy can achieve the first best allocation. Given the difficulty of charging a lump sum tax we next show that combining the wage or recreation tax with a utility maximizing conservation agency achieves the first best outcome. Next we present the scenario where the public good, the environment, is privately provided. We show that a subsidy on the private land set aside for the environment combined with a recreation or wage tax can achieve the first best outcome. Given the growing interest in ecosystem service markets and in providing ecosystem services this analysis highlights that tax instruments can be used to provide the optimal amount of land devoted to the environment.