Amenity Benefits and the Optimal Allocation of Land

Agricultural land often yields significant amenity benefits that may not be reflected in the prevailing allocation of land between agricultural and nonagricultural uses. This paper introduces a simple supply-demand model that incorporates these benefits in the determination of optimal land allocation. Three-stage least squares and county-level data are used to estimate the supply and demand parameters. These estimates confirm the plausibility of the conceptual model. Results from the contingent valuation literature illustrate the extent of underallocation of land to agriculture due to existing institutional conditions. Some corrective measures and their distributional effects are discussed and quantified.