Land use taxation policy and agricultural land use

Many people feel there are imperfections in the land market that result in a sub-optimal allocation of land to its various uses. Legislators seek to remedy this situation with assorted tax policies that may alter land use decisions. The Montana Legislature has passed an act known as the Montana Economic Land Development Act (MELDA) to influence land use in Montana. This paper evaluates MELDA from an economic viewpoint. A spatial model of the land conversion process for agricultural land is developed. The imperfections and external costs that cause a socially sub-optimal allocation are identified, and the economically correct tax policy to mitigate the imperfections and internalize the external costs is presented. Comparing the policies of MELDA to the economically indicated policies, MELDA is found to be a deficient act likely to result in even greater inefficiency than the free market allocation. A policy alternative containing the proper elements to achieve the social welfare-maximizing allocation is then presented. STATEMENT OF.PERMISSION TO COPY In presenting this thesis in partial fulfillment of the require^