Chapter 3 Studying betterment and compensation from the perspective of property rights
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Land value largely depends on location advantages and decisions concerning the use of neighbouring sites. This interdependent quality of urban land is referred to by economists in terms of externalities: those impacts (positive or negative) that are not reflected in the pricing system of land (Loughlin, 1988). Betterment and worsenment are typically derived from externalities: betterment is a positive externality generated neither by the capital investment nor by the decisions of land users themselves; worsenment is a negative externality in the same way. In dealing with the externality issue, the Pigovian argument and the Coase theorem are most influential. The Pigovian approach to internalizing an externality is through taxation and regulation (Pigou, [1920] 1929). For instance, a factory emits smoke that pollutes the environment, thereby incurring damage to the community. The costs of polluting, however, are not incorporated into the production costs of the factory. Thus a divergence between ‘marginal social net product and marginal private net product’ emerges.

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