Meeting the policy challenges of rural and peri-urban land use in Australia: Government, governance and public policy
4. Challenges
Designing public policy that enables private and public land to be used in a way that maximises total value for the community presents a number of challenges. These include the need to allocate land uses across space and time, the presence of unpriced values, external costs and benefits, possible interaction with other policy areas, and governance issues.
4.1 Allocation in space
A landholder may face a decision to allocate a fixed amount of land between alternative crops. The landholder will consider the expected revenues and costs associated with each crop and make an allocation that ranges from all the land being allocated to wheat for example, through to all the land being allocated to barley. If the landholder is seeking to maximise the value of the land, land will be allocated between the two crops so that the marginal return from the two uses is equalised. If the marginal return was higher in one use than the other, the total value generated by the land could be increased by reallocating some land from the lower value use to the higher value use. When the marginal returns from the two uses are equal, it is not possible to reallocate land in a way that increases the total economic value (Segerson et al. 2006).
Decisions about how to allocate land over space can be more challenging for governments and landholders when values associated with land use do not have market prices. This can make it difficult to compare the relative values associated with alternative land uses. Consider a case where public land can be allocated to the preservation of old growth forests for environmental enjoyment or to commercial forestry. The value of commercial forestry can be estimated more easily than the alternative environmental values which cannot be readily observed in markets.18
18Methods to derive unpriced values include ‘revealed preference’ where the values of environmental goods and services are inferred from market transactions. For example, people who choose to travel further (and spend more money) to visit sites with better scenery, less congestion or more wildlife. This additional spending can give an indication of the value of the site being examined. In the ‘stated preference’ approach individuals are engaged in conversations through structured surveys in an attempt to elicit their values. Scenarios are presented to respondents who are then asked to indicate their willingness to trade off money against other good, services or environmental conditions (Grafton et al. 2004).These broad methods contain a number of variants; however they all seek to elicit or measure values that cannot be directly observed in markets. Variants of a revealed preference approach include the travel cost method, hedonic pricing, and the production function method. Variants of a stated preference approach include contingent valuation and choice modelling. For a discussion of these and consideration of strengths and weaknesses see Wills (2006) and Grafton et al. (2004).
4.2 Allocation in time
All managers make decisions, or a series of decisions, about how to maximise the value gained from land over time. In agricultural landscapes where there is opportunity to subdivide land for residential use, for example, farmers that seek to maximise their financial return from land, will sell when the expected net present value – the sum of all future cash flows – of the land in residential use exceeds what they could earn from farming uses – net of any conversion costs and the opportunity cost of the land in its undeveloped state (Irwin et al. 2006).19 The landholder will make allocation decisions that lie along a spectrum from no conversion taking place at any point in time to complete and immediate conversion.
Allocation through time becomes increasingly challenging where uncertainty and irreversibility are present. A government agency that manages peri-urban land may face a decision that involves draining a wetland, for example, so the land can be allocated to a housing development. This decision can be subject to uncertainty about the resulting benefits and costs and the conversion may also be irreversible – or reversible only at high cost (Grafton et al. 2004).
19This need not be simply when the net present value of conversion is positive. In this case there may still be value in waiting because of the potential for even greater value of conversion at a later time (option value) (Irwin et al. 2006).
4.3 Unpriced values and externalities
Decisions by public and private landholders on how to allocate land resources over time and space is made more difficult when values are unpriced, as discussed in section 4.1, and when costs and benefits fall to third (or external) parties.
In many allocation decisions, all of the costs and benefits associated with alternative land uses flow to the parties directly involved in the transactions. For example, farmers receive income from agricultural activities, property developers receive income from building homes and residential buyers receive shelter from buying a home. If there are no spillovers from these use decisions and all parties can make land use decisions to maximise their values, these private land use decisions will also maximise total economic value.
However land use decisions can generate costs and benefits that fall on third parties not directly involved in the land use decision – this is an externality. Agricultural land use in a peri-urban area, for example, can impose external costs on the community if fertilisers and pesticides run off into rivers and waterways. Conversely, having the views of remnant native vegetation may generate external amenity benefits for nearby residents. These external costs and benefits are not accounted for in private land use decisions and as a result can fail to maximise total value for the community. In particular, if external costs are present with a given land use, the private allocation of land to that use will exceed the amount that will maximise total value for the community. In the presence of external benefits, private allocation to such a land use will be less than optimal from a community-wide perspective (Segerson et al. 2006).
These external costs and benefits may not be evident at the time of the decision and can accrue through time. A particular land use, such as irrigated agriculture, may initially generate benefits to the community but lead to depletion of an exhaustible public underground water source over time (external cost). Alternatively, a use such as forestry may sequester carbon over time (external benefit). In the absence of well functioning markets for water and carbon these future costs and benefits may not be reflected in the private returns from alternative land uses (Segerson et al. 2006).
To facilitate land being used in space and time so that total value for the community is maximised, these external costs and benefits need to be factored in. Different tools can be used to take account of external costs and benefits to facilitate land allocation to maximise the total value to communities of land use and these will be discussed in section 5.
