Question

In an article in the agriculture magazine Choices, Oregon State University economist JunJie Wu made the following observation about the conversion of farmland to urban development: 

 

Land use provides many economic and social benefits but often comes at a substantial cost to the environment. Although most economic costs are figured into land-use decisions, most environmental externalities are not. These environmental 'externalities" cause a divergence between private and social costs for some land uses, leading to an inefficient land allocation. For example, developers may not bear all the environmental and infrastructural costs generated by their projects. Such market failures provide a justification for private conservation efforts and public land use planning and regulation. 

 

Source: JunJie Wu, "Land Use Changes: Economic, Social, and Environmental Impacts," Choices, Vol. 23, No. 4, Fourth Quarter 2008, pp. 6-10. 

 

By market failure, the author means:

 

(i) benefiting from a good without paying for it. 

(ii) a situation that occurs when one person's consumption of a unit of a good means no one else can consume it. 

(iii) a situation in which the market fails to produce an efficient level of output. 

(iv) a situation in which a benefit is present that affects someone who is not directly involved in the consumption of a good or service. 

(v) the tendency for a common resource to be underused.