Taxation on land development with the density control and environmental externality

Abstract

This paper adopts the real options approach and hierarchical game to examine how the social planner should change the optimal taxation on the land development under density ceiling control. We assume the reduced ecological value from development influences the choices of social planner and should be internalized into the model by the social planner while the developer ignores it. According to the results, we show that the social planner respectively implement the taxation on land development to alleviate the size of negative environmental externality and an increase of the tax rate on the developed property will decrease the tax rate on the vacant land when the taxations on land development are simultaneously regarded as given by the social planner under density ceiling control.