Optimal land development with endogenous environmental amenities

A spatially explicit model of the optimal timing and location of land development is presented that incorporates dynamic interactions between land development and water quality. Ignoring two-way interactions leads to a lower level of water quality, more development, and lower social welfare. The optimal pace and pattern of development can be achieved through the assessment of an impact fee that internalizes pollution damages and irreversibility costs. Our results demonstrate the importance of accounting for the spatial dimension of land use, the interdependence between land use and en-vironmental quality, and development irreversibility in models of urbanization and amenity-driven growth. Key words: dynamic, economic and ecological interactions, spatial land use pattern, urbanization, water quality, natural amenities. Advances in information technologies and ris-ing incomes have led to a more footloose pop-ulation in the United States that is increasingly attracted to areas with high-valued natural amenities. Once rural counties in the Moun-tain West, for example, are among the fastest-growing counties in terms of both population and income (Shumway and Otterstrom 2001). While the increasing economic importance of environmental amenities is relatively well understood,1 the feedback effects between economic growth and ecological changes are not. Urbanization and land development have detrimental ecological impacts, which can un-dermine those very environmental amenities that attract growth. Long-term economic and ecological sustainability depends on achiev-ing a balance between economic growth and ecological change, which in turn requires an understanding of the dynamic interactions be-tween the economic and ecological systems