Endogenous Spatial Externalities: Empirical Evidence and Implications for the Evolution of Exurban Residential Land Use Patterns

Abstract

The notion that “neighbors” may generate spatial externalities is well established in economics. In addition to textbook examples of externalities among firms, a significant body of empirical work in urban and environmental economics has provided evidence of the effects of neighboring, undesirable land uses on residential location decisions and housing values. The goal of this chapter is not to challenge or augment this literature, but rather to use it as a starting point in asking whether spatial externalities may influence actual land use conversion decisions by landowning agents. The basic thesis proposed here is that agents’ consideration of these spatial externalities may influence their land use decisions if the resulting change in a parcel’s relative values in alternative land uses is sufficiently strong. If so, then the presence of such spatial externalities creates an interdependence among neighboring agents’ land use decisions, which implies that land use conversion may be partially driven by a process of endogenous change.