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

Substitute (14) into condition 1),

P (a* + α⁰) ≤     1              τw

P(a* + a0)   L - a⁰ - a*  (L - a0)wτ + a*δ

which is a second necessary condition for the socially efficient amount of open space to
be self-financed. Recall that the condition for the existence of a non-zero socially
efficient amount of open space is in favor of a large marginal change rate of equilibrium
land price at the starting level of preserved open space, because a large marginal change
rate of equilibrium land price means residents are willing to pay a large amount of money
for preserving an extra unit amount of open space in the community, relative to the
marginal cost associated with this preservation. The condition (15), however, imposes an
upper bound on the marginal change rate of equilibrium land price if the increased tax
revenue is the only source of fund for open space preservation. In condition (15), the
right hand side can still be thought of as the marginal cost of preservation, but this
marginal cost is the maximum defined by tax increment financing. If the post-
preservation marginal benefit, as represented by the left hand side, is greater than the
financially defined marginal cost, it would be socially efficient to preserve more open
space which, however, is beyond the capacity of tax increment financing. As a result, the
post-preservation marginal benefit less than the financially defined marginal cost is a
necessary condition for the socially efficient amount of open space to be fully self-
financed.

We summarize as follows the condition for the existence of a non-zero amount of
open space that is socially efficient and that can also be fully covered by property tax
increment:

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