Urban Economy

Suppose that each acre of agricultural land yields b dollars of open-space benefits to society, over and above the private benefits it produces. Landowners rent the agricultural land to housing developers when the urban land rent r exceeds the agricultural land rent r_A. Society would want the landowners to take the lost open-space social benefit into account when deciding whether to switch land to urban use.

What policy intervention could society carry out in order to fix this market failure? Illustrate and explain the policy and its outcomes in:

A closed city (zero mobility);

An open city (full mobility).