Many of these bodies play important roles in determining land use through direct ownership, zoning ordinances, building codes, direct regulation, land use plans and transportation designs. In many ways this is a remarkable decentralized system of markets and governments that can give play to a wide range of individual preferences. But, important questions can be raised about the ability of this system to fully serve the welfare of its residents with respect to land use. Externalities, or spillovers, from market activities that affect individual welfare and business operations, but are not reflected in prices, can deflect the region from its potential. Examples include urban land uses that harm the hydrologic or water cycles of ecosystems, uses that limit habitat for species or uses that disburse pollution to unwilling victims.
Spillovers arising from government actions can also lead to welfare losses.
Examples include zoning upstream of wetlands for development or not providing an adequate amount or range of public goods and services, including natural areas. Markets can fail to provide public goods like natural areas because no one can realize gains from their provision and not all of these impacts are addressed by effective public policies. That is, both market and government failures have a bearing on natural areas and related biodiversity. It must be stated clearly at the outset that the test is whether correcting these market or government failures could lead to a more efficient allocation of land to competing uses that would satisfy better the public's preferences. Note that it is the individual member of the public whose preferences are important for this purpose.