Land-Use Patterns and Spatially Dependent Ecosystem Services: Some Microeconomic Foundations

This paper develops and reviews some microeconomic foundations for the provision of spatially-dependent ecosystem services from land. We focus on ecosystem services described by a production function with spatial dependencies in the primary input — the amount and pattern of land in particular uses and management. Many ecosystem service production functions are affected by spatial dependences, particularly those involving fish, wildlife, and water quality. We illustrate the various sources of demand for ecosystem services and then provide a novel development of the effects of alternative spatial dependencies on the shape of the supply curve for ecosystem services. Our analysis emphasizes that the optimal supply curve requires a mechanism to coordinate landowners’ decisions and internalize the input externalities that arise from production functions being spatially dependent. Finally, we use our framework to illustrate and review some key implications for linking demand and supply for policy design.