Economic Instruments for Controlling Urban Area and its Urban Land Prices

Settlements in a region likely to continuously evolve with the growth of human numbers. As a logical consequence, the number of humans who have to settled in the region is also getting bigger. The needs of the settlement eventually became its own problems because human existence in a spaces are not balanced, and even will not likely be balanced. Settlements tend to be concentrated in the urban center where economic activities are also concentrated in it. In the end, expansion and inequality of settlement eventually became the problem due to the changes of land use and changes of land rights with various negative implications.

In every city there will always be a factor that becomes the driving force the occurrence of a changes of land use and changes of land rights. For example, the metropolitan cities like Jakarta, Bandung, Surabaya, or other city which have a large population and high economic activity, encourages the occurrence of a change of land use and changes of land rights. This drive also strengthens the assumption that land is a commodity of a very profitable commerce. A result of this assumption, then fertilizing land ownership for the highest benefit of the economy became very common and popular especially in the populous city that has high economic activity.

Based on the Indonesia’s Act of Principle Agrarian, the land is a resource in the quasi State for the most of people's prosperity.  However, in the process, countries seen confusion and act anomalies in order to control land ownership for people's prosperity. One example is the local governments often leave over the function of land in the rural area that was already clearly destined for agricultural activities into a new commercial district with proposition of increased economic growth purely. On one side, with all the process, the Government has struggled to make the rules of Spatial Plan Area, on the other hand, by not considering the interest of the people, the Government let the plans that already made violated so only.

The process of changing the function of soil or land rights as outlined above is one of the causes of weak government controls against Agrarian Affairs. When the land used as trade goods (commodities) that are commerce freely, then the market mechanism will certainly have enormous control which will give a very significant effect on land prices. This is particularly relevant to the classical economic theory of Adam Smith who introduced free-market capitalist with the emphasis on increasing prosperity rather than equitable prosperity. In relation to land use nad land prices control, then the market meant here is the market property (properties) are mainly land and buildings, while the producers in this context is the holder of the right over the lands and buildings, and the consumers are its users.

Based on the elaboration of the problem above, I think that it requires economic instrument which aims to regulate and control the structuring of cities, particularly in the context of land. Economic instruments in this context can only be applied to the city that first embraced free market economic system, and second, consider land as a free goods. Thus, economic instruments is a combination of government intervention to prevent a market failure by structuring the city. For example, prevent the occurrence of monopolistic land markets by structuring the city for public spaces In fact, the most liberal country such as the United States once did, the intervention against the land was indeed done in earnest, because the land does not have the ability to be reproduced and its location is a physical construction of its monopolistic practices.

In addition to the above, economic instruments are also very concerned with the attempts of increasing regional or urban areas income. However, not all efforts in increasing income has an effect or can be used to control a region or urban areas. Such as the determination of the Earth and buildings tax rules in Indonesia that have not been used as tools to "regulate", but otherwise, the city physical planning and design is used to increase taxes.

There are some economic instruments that can be used as an option in carrying out the policy to control land use and land prices of the cities.

A. Controlling Land Prices

Controlling prices here may not necessarily be monetary operations as against a market by Bank Indonesia to control interest rates, but rather to the domination activities of the land stock so that the supply of land can be arranged. Although not fully managed, according to Kuswartojo (2010), Jakarta has done land ownership by the Land and building Company (BUMD) to control the price of land in Kemayoran. Therefore, most likely thing to do is to prevent the occurrence of asymmetric information that Mankiw told in his book Principle of Economics (2011). He mentioned that one of the causes of the occurrence of market imperfections is because one party has more or better information that other. That can occur between the consumer and the producer, or a portion of consumers against producers. Therefore, the efforts of the Government to be able to disseminate information to the rest of the people about land price should be done. Government must have the land price database that should comply with accurate and transparent criteria so that the public as a potential customer or producer can find out the market price of land that fair between one and the other.

B. Property Tax

Property taxes are used as tools in the land use planning can be used to encourage the occurrence of changes in land use. This can be done if the property taxes were set based on a master plan. For example, a settlement in the region when it was about to be transformed into a commercial area then the determination of the value of the taxes should be based on the new plan. It is of course difficult to do in Indonesia because the Earth and building tax is based on the real value of land and buildings. The meaning is, the value of market is absolutely used to determine the magnitude of the tax and not the other way around. On the other hand, property taxes still more regarded as a means of increasing income for area and yet can be used as a tool to control urban area/region.

C. Fiscal Area

Fiscal area in question is a form of government intervention towards the development of the area are exempt from various taxes for the purpose to pull economic activity. Although this will be very contrary to the spirit of increased State revenue from taxes, but in some cases of some regions the application of this policy is very possible thing to do.

D. Area Incentives

In this context, the developer is possible to develop a region exceeds a predetermined limit on condition that the developer must build facilities and spaces for public. This is done to stimulus the construction of public facilities in order to be an interesting thing to be built not only for Government, but for the developer. This means that if a developer wants to have the right to build larger area, then the developer should be willing to build facilities and public spaces. Thus indeed has happened a mutually beneficial transaction for the Government and developers.

E. Betterment Tax

The tax is charged by the Government on the basis of the increase in land prices. The rationalization is due to an increase in land prices is the impact of the development by the Government. For example, when there is an infrastructure of roads, sidewalks, hospitals, and universities, the price of land surrounding the site became higher. On the matter of this then the Government should get a piece of the price mark-up. In addition to adding to the revenue from the tax, it can also be used to prevent activities about land speculation and hoarding wealth by the form of land.

The discussion above shows that the effort to control the city with economic instruments contain a fairly complex dimensions that include control of the city, the economic development of the city, and increasing city’s income. At this very current conditions, seems that the focus of the Government is how to improve the income, but overlook about the role of Government in its management functions. Though some of the above policies that can be applied in order to increase city’s revenue, it can also be used to improve the controlling function by the government against spatial planning, land use planning, and land prices of the cities.

On the other hand, economic instruments are only being effective when the market moving towards perfect conditions. Even if it does, the market of land and/or property is not possible as perfect as the other goods and services market due to the limited supply and unlimited demand that will not reach the point of perfect balance. And yet, the location advantages that play an important role has a monopolistic characteristic in nature where location is a significant factor in determining the price of the land.

But at least, with the land price control efforts such as information disclosure to reduce asymmetrical information for consumers and other market participants can assist land and property markets becoming healthier. Therefore, economic instruments in the context of controlling the city in this case that affects spatial control, land use, and land prices do not same as the government make a market intervention as an operational, but rather as the efforts of political will by the Government as an organization that has the authority in terms of regulating and controlling an area.