Revealing “space” in spatial externalities: Edge-effect externalities and spatial incentives

This paper analyzes the spatial incentives created by distance-dependent negative spatial externalities, titled “edge-effect externalities.” It illustrates standard externality results in a spatial context and derives several new results. While the externality creates an incentive for a recipient to distance himself from the externality-generating land use, this distance is too small from a social standpoint, rationalizing buffer zones imposed by regulatory authorities. Further, the market rental rate of land for the externality recipient is higher than socially optimal, resulting in a potential barrier to entry for the impacted land use. Finally, although the recipient understands and can geographically avoid externality damage, standard market failure occurs. Results are demonstrated using graphical and land rent interpretations of familiar aspatial general equilibrium conditions. The paper thus strives to provide a more thorough exposition of the spatial impacts of this class of externalities than provided elsewhere in the literature.