Residential land development provides many economic and social benefits to society. Most economic costs are factored into and paid by residential land developers (as the producer of the economic good) during the residential land development process. However, residential land development also comes with costs to the ecosystems on which it is built that are not included as a cost incurred and paid during the course of the development process. The occurrence of ecosystem impacts is especially common on land that was previously in its natural state.

Definition of Negative Externalities

The second conservation land development term a legal professional should master is—like the first term I covered—an economic term: negative externalities. When the environmental costs to society (social costs) of a residential land developer’s economic actions are greater than the development costs incurred by the developer (private costs), the difference between the social costs and private costs is an external cost imposed on society. Generally speaking, negative environmental externalities are phenomena that otherwise bypass the marketplace decision-making process and, as a result, prevent free markets from maximizing social welfare. More specifically, a negative environmental externality reflects the external cost amount that land developers do not bear on account of environmental costs imposed on society by the development project’s landscape alternations and ecosystem impacts. The failure to consider such external costs as part of the land development transaction is a form of market failure.

A negative environmental externality is thus defined as:

  1. the harmful impact of a marketplace actor’s economic activity,
  2. that detrimentally impacts the economic well-being of third-parties (i.e., the external cost),
  3. without any transactional exchange occurring between the causing party and the affected third-parties that monetarily prices into the transaction those external costs.[1]

Air pollution is the classic example of a negative environmental externality because the producer’s private costs of production do not automatically capture the external costs of pollution passed onto society.

Effective Conservation Land Development Requires Land Use Laws that Address Negative Environmental Externalities

Economic theory tells attorneys that negative externalities can be internalized by obliging economic actors to absorb the external costs reflecting the harmful external impacts that result from their private economic activity. Conservation development theory tells attorneys that to capture the economic benefits of long-term ecological protection that conservation land development exposes requires commensurate land use laws that address the negative externalities and the market failures they represent.[2] Internalization of these costs can be achieved either through direct government intervention or private transactions.[3]

Land Use LawMakers Challenge: Correcting the Market to Capture Negative Environmental Externality Costs During the Development Process.

When dealing with negative environmental externalities in the conservation land development profession, a significant challenge for land use lawyers providing advice in that area involves effectively addressing the market failure that negative environmental externalities reflect. That is true whether advising private sector clients, local governments drafting conservation land development laws and regulations, or public land use planning agencies implementing such laws or regulations.

Due to the economic and legal complexities of correcting economic markets to internalize environmental externalities, attorneys advising clients need to direct party focus onto feasible solutions. Such a solution-oriented approach requires moving past an approach that attempts to prohibit otherwise socially beneficial economic activity that causes the negative environmental externalities to crafting and implementing land use laws that correct the market failure as part of the land development process transaction. In their simplest form, local land use laws need to ensure a properly functioning land development market by requiring the external costs of a development project’s landscape alternations and ecosystem impact to be internalized into the development process transaction pricing. By using a market failure correction approach, local government policymakers have the opportunity to successfully reduce negative environmental externalities that arise from residential land development projects. Such a reduction of negative environmental externalities can be accomplished without causing secondary effects that lessen the socially-beneficial economic mechanics that occur between land developers as producers and home purchasers as end-use consumers.

In summary, the internalization of land development projects’ environmental costs is the first step to the synthetization of private-sector marketplace behavior and environmental protection. Suppose the internalizing cost process can effectively quantify the external environmental costs. In that case, land use laws are the more socially-beneficial response to negative environmental externalities that arise from residential land development. By internalizing the costs, the actual, higher social cost will be accounted for.

As a final point, due to the external benefits of ecosystem protection, the internalization of such costs theoretically can lead to an even more efficient and socially beneficial method of allocating economic and environmental resources during the land development process to enhance the natural environment’s delivery of socially-beneficial ecosystem services. Ecosystem services will be covered in a future post.

[1] Jeroen C.J.M. Van den Bergh, Externality or Sustainability Economics?, 69 Ecological Econ. 2047 (2010) (discussing the “systems perspective” of externalities and the dynamic character of combined environmental and social optimization systems).

[2] Jeroen C.J.M. Van den Bergh, Ecological Economics: Themes, Approaches, and Differences with Environmental Economics, 2 Regional Ent’l Change 13 (2001) (discussing how the foundation of neoclassical environmental economics is the theory of negative externalities).

[3] Erik Gómez-Baggethun & Roldan Muradian, In Markets We Trust? Setting the Boundaries of Market-Based Instruments in Ecosystem Services Governance, 117 Ecological Econ. 217 (2015).