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

into residence location. This capitalization raises property value, and further increases
tax revenue that may be sufficient enough to fully cover the investment in open space.
Our economic model identified under what condition(s) there exists a non-zero socially
efficient amount of open space that can be fully financed by property tax increment.
However, people value open space differently and only pay for the amount of amenity
they receive at their residence location from preserved open space rather than pay at a
fixed rate. Our economic model demonstrates these spatial effects of structured open
space by simulating different spatial configurations that may be commonly have been
commonly considered by local land managers in preserving open space.

Our economic model shows that there exists an optimal amount of open space that
can maximize the net value of community land, as long as local residents’ (standardized)
current willingness to pay for open space, as revealed by the marginal change rate of
equilibrium land price with respect to open space, is more than 2 times the inverse of the
total area of community developable land, a very weak condition given the typical
magnitude of relevant parameters for a community. This condition establishes the
theoretical foundation for local governments to preserve open space but remain neutral on
how to finance open space preservation. If local governments intend to use the property
tax increment to finance acquiring open space land, there exists at least a second best
level of open space that can be fully financed by increased tax revenue and that may be
socially efficient, as long as the maximum possible marginal change rate of the

2

equilibrium land price with respect to open space is greater than the larger of------ and

L-a⁰

1δ

-----θ(--+1). Surprisingly, a strong capitalization of open space amenity into land
L - a⁰ τw

35

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