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



invoked for constructing local infrastructure, the involved area is commonly restricted to
a smaller in situ area or block, i.e., the financing district, rather than the whole city. In
this area, equilibrium land rent can be considered spatially homogeneous. Specifically,
estimating the marginal change rate of equilibrium land rent requires defining and
compiling a data set of land price for districts or small communities across the
metropolitan area that contain varying amount of preserved open space, such that
equilibrium land price is homogeneous with respect to open space within the district and
heterogeneous with respect to open space among districts. Consequently, a hedonic land
price function, lnP(a) = f(x1, x2, .., a, a2, a3, ...) can be estimated, where xi represents

P'(a) lnP(a)                  2

land characteristics that affect land value. Because —=÷ =-----=β = β + βa + βa ,

P(a)       a        0    1     2

where βi is the estimated coefficient parameter, the marginal change rate of equilibrium
land price can be estimated for different amounts of open space. Even if the involved
area for tax increment financing is large enough to support spatially varying equilibrium
land price, the spatial average equilibrium land price can be estimated more easily by the
normal procedure of hedonic method without dividing the city into small homogeneous
tracts. In addition, a contingent survey can also be used to directly solicit local residents’
WTP for open space. Benefit transfer presents another option to derive the information
that is needed for evaluating the decision of open space preservation.

In the investigation of the economic condition for a self-financed, socially
efficient system of open space preservation, we didn’t impose strong restrictions on the
common utility function such as specifying a specific function form except only requiring
concavity. Consequently, the economic condition is derived as general as possible. For
example, the marginal change rate of equilibrium land price is a non-linear rather than

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