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

ratio δ∕(τw) is greater than 1, the necessary condition for the socially efficient amount of

P'(a⁰)      1 δ

open space to be self-financed may be defined by —    >------(1 +--). Note that

P(a⁰)   L - a⁰    τw

these two conditions only guarantee the existence of the socially efficient amount a^* and
the self-financed amount a^t, but remain neutral on the relative magnitudes of a^* and a^t.
Therefore, as long as the standardized residents’ current WTP for open space, or the
marginal change rate of the equilibrium land price with respect to preserved open space,

1δ 2

is great than the larger of------(1 +--) and------- there exists at least a self-financed

L - a^-   τw     L - a^-
amount a^t of open space, and may exist a socially efficient amount a^* that can also be
covered by increased tax revenue, depending on the relative magnitudes of a^t and a^*.

Unfortunately, the relative magnitude of a^t and a^* is not explicit. We proceed by
examining the condition required of residents’ WTP under which the socially efficient
amount a^* of open space can be fully covered by property tax increment, i.e., a^* < a^t. We
define the following system for the set Γ such that ∀a^*∈Γ is socially efficient and can
also be fully financed by property tax increment: 1) the socially efficient amount a^* of

P(a)

-ʒr(l +--—ɪ) ; 2) the maximum self-financed

*    -*

a^*)     P(a^- + a^*)

1      a^tδ

------0----- [--+ (L - a⁰)]; 3) the self-financing
L - a^-- a^t τw

amount a^* being self-financed, a^* ≤ at.

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