SpatialWelfareEconomics.PDF

Spatial Welfare Economics Wilbert Grevers1 16 June 2004 Working paper to be presented at the IGS Spring conference, June 2004 Preliminary Draft. Please, do not cite or quote! 1University of Twente, Insitute for Governance Studies, School of Business, Public Administration and Technology, Department of Economics, P.O. Box 217, 7500 AE, Enschede, Netherlands w.a.j.grevers@utwente.nl 1 Abstract This paper addresses the question whether land as a product conforms itself to the stan- dard products in the underlying theoretical framework of Welfare Economics. Spatial Economics offers a different framework in which efficiency does not imply marginal cost pricing. When formulating a land policy, the goals of affordable housing and optimal land use seem to lead to a contradiction in this alternative perspective. Based on the literature on capitalisation, a reconciliation of the two goals would require a combination of perfect competition and full taxation on the profits of landowners. 2 1 Introduction The role for public policy with regards to regulation of the private sector is often based on the neoclassical framework for the allocation of goods through a system of perfectly competitive markets. While adjustments can be made in this framework to account for institutional aspects, such as transactions costs, it is also possible to adopt an entirely different framework. This applies especially for markets for which perfect competition is not the right reference, because of intrinsic monopolistic or oligopolistic tendencies, due to infrastructural limitations or natural advantages. But the use of the neoclas- sical framework might also be questioned from a different theoretical angle: the price mechanism. Here mechanism can be interpreted literally, in terms of price formati