This article investigates the design of property taxation both before and after development in a real
options framework where a fixed number of landowners irreversibly develop property in an
uncertain environment. We assume that densely developed properties reduce open space, and
thereby harm urban residents. However, landowners will ignore this negative externality, and
will thus develop properties more densely than is socially optimal. The regulator can correct this
tendency by imposing taxation on property both before and after development. It is, however,
unclear whether the latter should be taxed at a higher rate than the former even though the negative
externality arises only after the property is developed.
