Berkeley Program on Housing and Urban Policy

We consider the general equilibrium implications of environmental regulations which result in a reduction of otherwise profitable residential development. Critical habitat designation under the Endangered Species Act is an important example. If the regulations affect a significant amount of land, they may have important effects on the rest of the regional economy-increasing rents and densities on lands not subject to the regulation, causing the conversion of lands from alternative uses, increasing the net developed area in the region, and decreasing consumer welfare. We develop a flexible general equilibrium simulation of the economic effects of critical habitat designation, explicitly considering the distributional effects upon owners of different types of land and upon housing consumers. The results of our simulation show that the most significant economic effects of critical habitat occur outside of the designated area. The prices and rents of non-critical habitat lands increase significantly. Incomes are redistributed across landlords, and the well being of housing consumers is further affected through these linkages.