The regulation of optimal development density q Tan Lee a , Jyh-Bang Jou b, * a Department of International Business, Yuan Ze University, Taiwan b Graduate Institute of National Development, National Taiwan University, Taiwan Received 28 April 2006 Available online 18 April 2007 Abstract This article investigates how a policy-maker should choose a density ceiling and how the optimal policy is affected by the underlying demand and technology parameters. We assume that developed properties reduce open space, and thereby harm urban residents. However, landowners will ignore this negative externality, and will thus develop property more densely than is socially optimal. A reg- ulator can correct this by imposing a density ceiling control. The regulator should force developers to develop less densely when (1) land development becomes less risky, (2) the development costs are expected to grow more rapidly, and (3) the rents of undeveloped land are lower. This is because under these three scenarios, a social planner will choose to develop vacant land sooner, and thereby develop it less densely. Ó 2007 Elsevier Inc. All rights reserved. JEL classification: D62; G31; L51 Keywords: Development density; Negative externality; Real options; Regulation 1051-1377/$ - see front matter Ó 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.jhe.2007.03.002 q We are grateful to the editor (Henry O. Pollakowski) and two anonymous reviewers for their constructive suggestions on this manuscript. We also would like to thank seminar participants at the 2003 Annual Conference of the Association for Chinese Management Educators, the 51st Annual Conference of the Australian Agricultural and Resource Economics Society, and the National Central University for their helpful comments on earlier versions of this manuscript. Tan Lee acknowledges financial support from the National Science Council, Executive Yuan, R.O.C. (Grant No. NSC-90-2416-H-155-027), and Jyh-Bang Jou acknowledges financial support from the Social Research Policy Center, College of Social Sciences, National Taiwan University. * Corresponding author. Fax: +886 2 23679684. E-mail addresses: tanlee@saturn.yzu.edu.tw (T. Lee), jbjou@ntu.edu.tw (J.-B. Jou). Journal of Housing Economics 16 (2007) 21–36 www.elsevier.com/locate/jhe JOURNAL OF HOUSING ECONOMICS