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 regulator
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.
