Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Breakdown of the market for developable land around a stochastic city with public goods

Coen Teulings, Wouter Vermeulen

Last modified: 2012-06-25


The option value on developable land in the vicinity of a city depends on its public investment path. We investigate the implied relationship between urban public goods provision and the market for developable land. First best investment in public goods and land conversion maximizes the total value of all urban and developable land. It will be implemented by a city that has the exclusive right to develop. Landowners may freeride on urban public investment if development rights are universal. Hence, a competitive market for developable land breaks down. Moreover, the core of a bargaining game between landowners is empty, even if their number is comparably small, so market power is unlikely to promote efficient trade. A breakdown will lead to underprovision of public goods and suboptimal urban growth.

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