Academic journal article
By Lovell, Sabrina J.; Sunding, David L.
Real Estate Economics , Vol. 29, No. 2
Sabrina J. Lovell [*]
David L. Sunding [**]
The management of economic activity on private land plays an important role in the effort to maintain and improve environmental quality in the United States. The paper develops a conceptual framework and an econometric model of the value of undeveloped land to show how preexisting development restrictions [a.sup.+] ect the cost of protecting habitat. The model is applied to the case of preverving vernal pools in California's Sacramento County by prohibiting development on agricultural land. Ignoring the existence of California's program of differential property tax assessment of farmland is shown to result in a large overestimate of the cost of habitat protection.
Managing the use of private land is an important part of government effort to improve environmental quality. A prime example of this idea is that prohibiting certain uses of private land is critical to protecting biodiversity. In the Untied States, 80% of endangered species have at least a portion of their habitation private land, and 50% exist solely on private land (Natural Heritage Institute 1998). Thus, while federal and state governments have extensive land holdings, active management of these lands alone is unlikely to prevent many species in the United States from becoming extinct. Other aspects of environmental quality are also affected by the way in which private land is used; water quality and air quality are both examples.
Often, environmental goals can be achieved without prohibiting all use of parcels with important environmental features. That is, privately owned and can often jointly produce economic goods and environmental amenities. For example, grazing land, which is relatively undeveloped, usually produces both livestock and wildlife habitat. What is required in such cases is for the government to define environmentally acceptable current and future uses of the property, and restrict the landowner to these uses. There are various policy options open to government agencies to restrict the use of private land in this way.
Increasingly, government agencies (as well as private conservation groups such as The Nature Conservancy and the Trust for Public Land) are purchasing partial interests in agricultural land. Conservation easements are an example of this type of policy.  Of course, by now it is well established that governments are not always required to pay landowners in order to regulate how private land is used.  However, even when the government restricts use without compensation, it is still desirable to know the cost of the regulation in order to assess its efficiency.
Measuring the cost of restricting development to improve environmental quality would be relatively straightforward if the status quo were unfettered development. But there exists a patchwork of prior distortions that complicates the analysis. One of the most important of these is differential property tax assessment of agricultural land that involves a development restriction. Programs for the protection of agricultural land have been in place for many years, and exist in all 50 states. Eight states, including California, have programs of differential property tax assessment of agricultural land whereby landowners voluntarily agree to forgo development for some prespecified period of time in exchange for reduced property tax liability (Aiken 1989). 
In this paper, we develop a conceptual model and an empirical method for estimating the cost of protecting habitat on private land in the presence of preexisting voluntary agreements that restrict development. With respect to restrictive differential assessment programs, we show that ignoring the presence of this program seriously biases the estimated cost of habitat protection. There are at least two underlying sources of bias. First, some land is already encumbered by development restrictions, a fact that lowers the cost to the landowner of further restriction. …