The growing population and increased consumption rates of the last hundred years make clear that we no longer have the luxury of using economic models that externalize environmental costs as if natural resources were infinite. The rapidly growing population in North Carolina- estimated to increase by 50% over the next quarter century and affect up to 8 million acres of natural land- is a prime natural laboratory to study the impacts of environmental regulation and ecosystem services on land values.
Urbanization impacts water quality and watershed health in three main ways: altering the hydrologic cycle through increasing areas of impervious surfaces; manipulating the physical environment; and contaminating the water chemistry through contaminants from a variety of activities associated with development such as landscaping, construction activity, and roads. The regulation of land use in a watershed can help reduce these threats by restricting land uses that individuals, enjoying the full benefit but paying only a fraction of the full social and environmental costs of such development, would be unlikely to observe on their own. The State of North Carolina Water Supply Watershed Protection Act was designed with just this purpose, and one of its most critical restrictions was a 2 acre minimum lot size that significantly impacted landowners’ ability to subdivide.
Coweeta researchers show through a study of vacant land markets around Asheville, North Carolina both before and after this critical legislation was passed that residential vacant lots supplied with surface water from a protected watershed were selling for higher prices than lots with other water sources. In the same study, we also show that people living in the protected watershed were being “taxed” in the form of declining property values, to provide the clean water that was making nearby properties more valuable.
While there exist many studies examining the effects of local land use regulations on property values, substantially less exist that address state and national land use initiatives that restrict density development or that are aimed at brining about environmental protection. This is the first research to empirically measure the effect of development density restrictions associated with water supply protection on land prices. Economists at the Coweeta LTER demonstrate that environmental factors like clean water have already been incorporated into the land market. This has happened as a result of regular market activities and not as a direct or intended consequence of actions taken by policy makers, showing that markets will be sensitive to changes in environmental quality, whether we actively account for that fact or not. However, if action were to be taken, a per capita tax of $276.24 would be sufficient to compensate those property owners whose property values were hurt by development restrictions.