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Jesse's avatar

I like these analogies. The one thing I think might not be accounted for is you could end up in a scenario where "price of raw land on the fringes should be tied reasonably closely to its value in alternative uses, such as agriculture" - but not because the price is anchored by the next best use of agriculture.

I think this premise is probably still right, but the principle of opportunity cost to justify it (as you point out) is flawed. Your continuum of alternative uses alludes to this. In reality, we could draw multiple curves series for different land use values starting from an urban centre on the left axis (zero on x-axis) and moving towards the agricultural fringe on the right.

The "highest and best use" for any particular parcel along the x-axis is determined by the land use curve that has the highest land value (y-value) at that particular point.

Because of this, we would eventually expect that as we move further to the right of the x-axis of the continuum, that the agricultural value curve would become the highest y-value and thus the highest and best use. We would expect there to be intercepts between various curves and uses so land value follows a continuum without any breaks.

Thus in principle without zoning regulations we should see a fairly continuous curve and gradually declining highest and best use, which progressively has agriculture as the dominant use. And so the prices/value at the margins should be reasonably close, not because of opportunity cost, but because declining urban use value eventually becomes superseded by agricultural value.

Normally when I see this depicted, agricultural use is usually represented as y = constant (horizontal line), an oversimplification. And urban use is usually represented as a 1/x type function that approaches zero. With agricultural use eventually superseding it as highest and best use.

The question then becomes if the existing jump in land values across (binding) urban growth boundaries are caused by regulation, then how does removal of those restrictions achieve an equilibrium by altering all land use curves?

On the one hand removing the binds on agricultural land would massively boost its value to restore the continuum. On the other, perhaps opening up so many options for residential development would somewhat devalue existing residential use values if rent is determined at the margin as according to Richardo's Law - on this point I cannot be sure yet. It does seem that even with 40 years worth of greenfield land supply available in some instances, residential land prices don't really seem impacted.

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