Tax Increment Financing for Optimal Open Space Preservation: an Economic Inquiry

The above mathematical exposure on the self-financed amount of open space
reveals an important condition for tax increment financing. That is, the marginal bid
price ratio at the starting point Ψ^,(0) = P'(a⁰)∕P(a⁰) must be greater than the marginal
1δ

critical value at the starting point Φ (0) =-----o(1 +--), otherwise the maximum

L - a ⁰   τw

amount a^t of open space that can be financed by tax increment would be zero.

So far, we have identified two amounts of open space and two types of conditions:

• the socially efficient amount of open space a*, under the condition for the

marginal change rate of households’ bid price with respect to open space at the

• the maximum self-financed amount of open space at, under the condition for the

marginal change rate of the bid price ratio with respect to open space at the

P'(a⁰)     1 δ

starting point о > ----(I + —)

P(a⁰) L - a⁰    τw

The central question is under what conditions the socially efficient amount of open space
can be fully financed by property tax increment.

Answering the above question reduces to comparing those two amounts of open
space and their corresponding conditions. The sufficient condition for a non-zero a^t that
necessary condition for the socially efficient amount a* of open space to be self-financed.

If the ratio δZ(τw) is less than 1, those two necessary conditions for the socially efficient

P'(a⁰)     2

amount of open space to be self-financed reduce to —ɪɪ- >------ . Similarly, if the

P(a⁰)   L -a⁰

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