How can land use policy enhance the exploitation of external urban agglomeration economies? In a system of heterogeneous cities, we show that the second-best land use policy constrains city creation, while subsidizing (taxing) urban development in cities in which the marginal-average productivity gap is above (below) average. This policy cannot be decentralized to competitive urban developers, yet competition among urban developers does result in a lower-best outcome in which development is subsidized everywhere if city creation is unconstrained. A numerical application indicates that a substantial share of the welfare gains from implementing a second-best land use policy may then still be attained, although the aggregate amount of land in urban use is considerably larger. ? The Author (2016). Published by Oxford University Press.

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1 January 2017

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Journal of Economic Geography 17(1) , pp.59-94, 2017

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DOI: 10.1093/jeg/lbv047

https://academic.oup.com/joeg/article-abstract/17/1/59/2930540

This Journal article is published under the centre's Urban programme.