What

are the economics of Colorados conservation easement policy?

As government acquisitions and regulatory restrictions on land have become cost
prohibitive and ineffective, governments have turned to conservation easements as a cost
effective method of conservation. Conservation easements allow landholders to retain their
property rights and use of the land but permanently remove development rights in exchange
for tax benefits.
In the case of Colorado, Colorado has preserved 1,591,390 acres of land through
easements according to the National Conservation Easement Database. Landowners who
conserve their land receive numerous benefits. For one, landowners receive a federal tax
deduction since a conservation easement can be considered a charitable gift. Additionally, the
state of Colorado offers tax credits to landowners for their donation. Finally, landowners who
bequeath the developmental rights to their land reduce their lands taxable value, which
reduces property taxes. Besides the monetary benefits that landowners receive there are
numerous social and environmental benefits associated with easements. Easement protect
open land from being developed or converted, thus reducing urban sprawl. By reducing urban
sprawl, things like biodiversity, property values, food security, water quality, soil quality, and
view-sheds can be protected.

In order to understand the economics of easements, we need to understand why there
is a need for easements. Consider open farm land in Colorado near a growing urban area. This
farm land can be used for growing wheat or converted into a new housing or retail
development. The open farm land provides benefits to society such as beautiful vistas, open
space, and wildlife habitat. Society shares in these benefits at no cost, therefore these benefits
are considered a positive externality. When the farm land is bought and sold in the market, the
external benefits are ignored. Since external benefits arent included in the market demand, the
market process will allocate less open farm land than the socially optimal level.

The graph in Figure I shows two demand curves. One demand curve is called the
marginal private benefit and the second demand curve is called the marginal social benefit. The
marginal social benefit demand curve is above the marginal private benefit curve because the
marginal social benefit curve includes the marginal external benefits of open land. Figure I also
shows the supply curve. The supply curve also called the marginal social cost curve. The
marginal social cost curve here equals marginal private costs since we assume marginal external
costs equal 0. In Figure I we see that when only marginal private benefit is considered and
marginal external benefits ignored, the quantity of open land preserved (QP) is below the the
socially optimal level (QS). Also, the price or value of the land, Pp, is undervalued at QP because
the external benefit is not factored in the market process. The distance between the two
demand functions: marginal social benefit (MSB) and marginal private benefit (MPB) is the
marginal external benefit (MEB). Marginal external benefit is excluded from the market process
on the marginal private benefit demand curve, but is included in the marginal social benefit
demand curve. In other words, market demand based on the private benefits of buyers
understates all the social social benefits of open land, which leads to too little of a quantity of
open land. Without intervention there will be a market failure due to the positive externality. In
order to correct this market failure, and move QP to QS, an economic instrument is needed.


Figure I

Price



Ps
Pp

MEB,
Marginal
External
Benefit



QP QS
Quantity Open Land
Preserved ( acres)


In the case of Colorado, the instrument used to move QP to QS, is conservation
easements. Conservation easements act as a policy instrument that internalizes the positive
externalities in open land. Since landowners have the right to develop their land, they must be
compensated for relinquishing these developmental rights. An easement incentivizes land
owners to conserve their land through state and federal tax credits and benefits. These tax
credits and benefits act like a subsidy to landowners by compensating them for forgone
potential profits. In order to meet the socially optimal quantity (QS), MSB must equal MSC. In
order to achieve this, the distance between MSB and MPB must made up. We know the
distance between MSB and MPB is MEB. Therefore, the subsidy/ benefits of easement to
landholders must equal MEB. The easement would act as a source of income that would
incentivize landowners to forgo their developmental rights. If the benefits of the easement
were equal to the MEB per acre, the quantity of open land preserved would move from QP to
the social optimum at QS. The MSC would shift right as the subsidy reduces the cost of forgone
income from developmental rights to landowners.





PS
PM


PSubsidy




QP QS Quantity Open Land
Preserved ( acres)

In conclusion, Colorado has successfully preserved 1,591,390 acres of land as a result of
using conservation easements. Conservation easements provide incentives for landowners,
which lowers their costs, and increases the supply of open land preserved. Easements are
effective because they internalize the positive externality and incentivize landowners to forgo
their developmental rights in favor of tax benefits. In order for easements to work, the tax
benefits and incentives must be greater than the benefits of development. Easements illustrate
an economic market tool that allows society to reach efficient outcomes.