The economics of land-use regulation in the presence of an externality: a dynamic approach

Land-use restrictions are frequently applied to separate non-polluting from polluting activities. In contrast to the existing literature, we simultaneously incorporate spatial and intertemporal aspects of the problem and endogenously determine the border of the zones. Intensity-orientated instruments alone, such as a spatially differentiated tax on inputs or outputs, are not able to support the socially optimal outcome and need to be complemented by instruments that affect choices at the extensive margin such as positive or negative land-use taxes or land zoning. The necessary changes required to transform a spatially optimal, yet static, environmental policy into an intertemporally and spatially optimal environmental policy are presented and discussed.