This chapter examines China’s rapid urbanization and its associated negative externalities driven by extensive farmland conversion, including environmental degradation, agricultural output reduction, and urban infrastructure strain. The Chinese government has implemented command-and-control regulations, such as the “Red Line” policy and land use quotas, to mitigate these issues. However, the top-down regulatory approach suffers from high transaction costs, implementation inflexibility, and misaligned incentives between central and local governments. Drawing on New Institutional Economics (NIE), the chapter reviews the existing literature to examine how property rights allocation, transaction costs, and institutional arrangements can internalize externalities. It analyzes China’s “Linkage” policy as an institutional innovation for transferring Land Development Rights (LDRs) and compares it with TDR programs in the USA. The discussion highlights their divergent governance structures, rights definitions, and market mechanisms, emphasizing the need for institutional reforms to enhance efficiency and equity in China’s land-use management.