Chapter 31: Problem 11

If a city's political leaders decided to limit sprawl by restricting residential and commercial development to an area within a prescribed distance from the city center, what would be the effect on land prices in the areas inside the development boundary and outside the development boundary?

Short Answer

Expert verified

Answer: The policy would likely cause land prices inside the development boundary to increase due to limited supply and increased demand, while land prices outside the development boundary would likely decrease due to increased supply and decreased demand.

Step by step solution

Analyzing demand and supply for land inside the development boundary

Due to the restrictions put on the residential and commercial development, the supply of available land inside the development boundary will become more limited. On the other hand, demand for land in this area may increase as more people and businesses would prefer to stay close to the city center.

Analyzing demand and supply for land outside the development boundary

Since residential and commercial development is restricted within the development boundary, the supply of land outside the development boundary will increase. However, the demand for land outside the boundary may decrease, as people and businesses may find it less desirable to be farther from the city center.

Deriving the effect on land prices inside the development boundary

As a result of the policy, the supply of available land inside the development boundary decreases while the demand increases. According to the law of supply and demand, when supply decreases and demand increases, prices will increase. Therefore, we can conclude that land prices inside the development boundary will likely increase.

Deriving the effect on land prices outside the development boundary

Due to the policy, the supply of available land outside the development boundary increases while the demand decreases. According to the law of supply and demand, when supply increases and demand decreases, prices will decrease. Therefore, we can conclude that land prices outside the development boundary will likely decrease.

Conclusion

If a city's political leaders decide to limit urban sprawl by restricting residential and commercial development within a prescribed distance from the city center, land prices inside the development boundary will likely increase due to the limited supply and increased demand. On the other hand, land prices outside the development boundary will likely decrease due to the increased supply and decreased demand.