Optimal preservation and pricing of natural public lands in general equilibrium

The optimal preservation and pricing of a natural environment in a general equilibrium economy, with labor and land the only factors of production, are examined. The natural environment serves as a congestible public good because of recreational visits and as a pure public good because of option and existence values. Efficient long-run land allocation among production, housing, and the natural environment requires that each use generate the economy's land rent. Decentralization of the optimum requires a charge on each recreational visit and a tax price on natural environmental quality. Second-best solutions in which this tax price is not levied are also examined and compared to the first-best in a Cobb-Douglas world. In general, there are four second-best strategies: conservation, a quota on recreation, visitation charges, and a tax on land. In the Cobb-Douglas case a visitation quota and a visitation charge are the only two second-best policy instruments. The results show the stiff pricing of recreation is called for to assure that natural lands generate rents comparable to urban bids. In the absence of such pricing too much land is developed and too little remains in natural preservation.