The Economics of Land Use Change

The aim of this paper is to provide an overview for non-economists of how land has been treated in economic theory. Land is an aggregate of many different attributes, providing many important functions, which are not part of market transactions. An analysis of the economics of land use change has to include the unique character of land. This uniqueness arises from its distinct "physical, ecological, and institutional" properties. Land use decisions are influenced by three groups of factors. First, physical, biological, and technical factors include the quantity, nature, availability and characteristics of land resources, which set definite limits on what operators can do in using land resources. These physical properties refer to the "raw land." But what an owner of land really owns is not raw land but "real estate." The existence of parcels of land or real estate is a matter of human institutions. Real estate comes into existence and is maintained in its existence as a result of complicated networks of institutional facts, whereas raw land is not. Second, institutional factors provide the 'rules of the game' in a society, establishing the human devised constraints and unconscious habits that shape human interactions. Contributing to this institutional setting are cultural, economic, political, religious, social, and traditional factors. Third, economic factors, such as supply and demand, shape present land use. Economic analysis of land use change should not be solely occupied with price signals and shadow prices but has to include historical and institutional factors as well. Land is a much social product as it is a physical reality. Interdisciplinarity and plurality are therefore essential and irreducible requirements in land use research. In this spirit, it is hoped that this paper will promote exchange of ideas and concepts among disciplines.

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