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



reasonable. Hedonic valuation studies, however, also found in many cases people value
their access to preserved open space in addition to the open space amount, which leads to
spatially varying land value at market equilibrium in response to the amenities that local
residents perceive they actually receive from preserved open space at their residence
locations (see Do and Grudnitski 1995, Geoghegan et al. 1997, Lutzenhiser and Netusil
2001, Mahan et al. 2000, Tyravinen and Miettinen 2000, for example). When the
capitalization of open space amenity differs spatially, the previous economic condition
for self-financed, socially efficient open space preservation may be biased toward the
optimistic direction in the sense that property value may be overestimated. In this
section, we introduce a distance variable in addition to open space area into the open
space amenity measure, and examine how this spatial heterogeneity in open space
amenities as perceived by local residents affects the economic condition of tax increment
financed, socially efficient open space preservation.

As before, the residential community in a metropolitan area is represented by their
location x and preserved open space a. Each household derives utility U = U(z, q, A(a,
r)) from their consumption of a numeraire good z, housing q in the units of land area, and
open space amenity A, while subject to the budget constraint z + Rq + tx = Y. Note that
the open space amenity A is a function of the amount of preserved open space a and
household specific location r relative to the open space in the community, and therefore,
each household can affect the amenity level of open space at their residence location by
their choice of residential community (x, a) and specific location r in the selected
community. The non-spatial model in section 2, which only considered the amount of

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