Spatial Externalities and Land Use Regulation: Simultaneous Optimization of Building Size, Lot Size, and Zonal Boundaries

Abstract

In a continuous city with three distinct land use zones consisting of firms, condominiums and detached houses, we derive the formulae – composed entirely of observable variables – which design simultaneous optimization of regulations on building size, lot size and zonal boundaries under the existence of agglomeration externality in the business zone and traffic congestion across the city. The formulae show that the optimal regulations require not only downward but also upward adjustment to the market size of buildings within each of the business zone and the condominium zone, followed by minimum lot size regulation in the suburb. Regarding the optimal size of the three zones, the boundary of business zone and the boundary between the condominium and housing zones should be shrunk inward relative to the respective market boundary, and the overall city size should also be more compact than the market city.