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Agricultural production is a major use of land, accounting for
more than 46 percent of the U.S. land base. Agricultural land use
is influenced by other land uses, including forest, residential,
commercial, industrial, recreational, and open space. The interaction
among these sometime-incompatible uses can lead to social conflict.
Government is often called upon to resolve these conflicts.
The Federal government, for instance, has a
long history of setting policy that influences land use: one need
only think of the substantial area of the U.S. where Federal ownership
determines use (including vast areas of public domain and national
parks), income tax policy regarding homeownership, and farm commodity
programs. Most recently, Federal environmental and conservation
initiatives such as the Conservation Reserve Program (CRP) have
greatly influenced private land use. On a smaller and more local
scale, though, State and local governments are (by tradition and
constitutional law) responsible for most land use policy. State
and local roles are most often manifested through efforts to direct
and control the conversion of land from rural to nonfarm uses. Programs
aimed at farmland preservation have received increasing attention
in recent years, from state, local, and Federal governments.
Land's potential uses and its location influence its economic value.
Agricultural land value, for instance, is influenced by net returns
from agricultural production, capital investments in farm structures,
interest rates, government commodity programs, property taxes, and
demand for nonfarm uses. It is often stated that the land market
will direct each parcel of land to its "highest and best use".
But that concept relies upon an idealized market where all participants
have complete information and property rights are so well established
that externalities do not exist, and the land use does not exhibit
public good characteristics. But, in reality, the land market is
characterized by a myriad of characteristics that prevent it from
operating in an idealized manner.
The entire value of the multiple products provided by land is not
always captured by the landowner, however. Some valuable products
provided by land, such as its scenic beauty, are available for free
to society in general. The inability of the landowner to capture
these "public goods" means that the value of these products
will not be taken into account when the landowner determines the
land use, leading to an under-supply of such valuable, but intangible
products. The desire to account for these nonmarket values often
underlies governmental intervention in land use determination. Conversely,
the full cost of certain land use decisions are not borne by the
landowner, and instead are imposed on other members of society.
The degradation of water quality due to leaching of pesticide applications
and soil erosion are examples. These "external effects"
are also often the basis for governmental intervention in land use
determination.
If there is one characteristic that distinguishes land, it is its
propensity to produce joint products that are valuable, but ancillary,
to its principal economic use. For instance, agricultural land is
often the source of important wildlife habitat. Other "rural
amenities" are also joint products of the agricultural production
process, including provision of open space, creating a sense of
agrarian cultural heritage, scenic landscapes, and environmental
cleansing. Markets for these "rural amenities" do not
exist. The solution to the inability of markets to accurately account
for these products is often government intervention through regulation,
property rights laws and institutions, incentives, and penalties.
Governmental programs to preserve farmland are prime examples.
Agricultural land also plays multiple roles within the farm economy,
serving as the basic input, being the largest single investment
item in a typical farmer's portfolio, serving as the principal source
of collateral for farm loans, and serving as a source of accumulated
wealth. Farm real estate values and cash rents are often considered
important indicators of the financial condition of the farm sector.
Farmland values and cash rents vary geographically across the United
States and over time.
Land use policies are often implemented to address issues with
implications that are much broader than just the farm sector. The
Conservation Reserve Program, for instance, has multiple environmental
goals, including reduction of soil erosion (which affects off-site
water quality), enhancement of wildlife habitat (which can affect
recreational benefits), and reduction in agricultural chemicals
(which improves ground- and surface water quality). The CRP is implemented,
however, as an instrument that changes land use. Conversely, other
governmental goals and policies can influence land use. One need
not look further than the Endangered Species Act, an initiative
aimed at wildlife, to discover how such policies can influence the
land use decisions of private landowners.
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