Land Rents and Land-use Patterns

1
Land Rents and Land-use Patterns

• Chapter 12

2
Definitions of Rent

• Land rentpayment for using land as an input
• Site rent (ground rent)earnings associated with
  a given location (monopoly rent,)
• Improvement rentearnings due to building,
  fertilizer, accessibility
• Contract renttenants pay to landlords
• Economic rentthe payment above the minimum
  required to keep a production factor in a
  specific occupation/industry (any input can earn
  rents, not just land)

3
Traditional land market

• Supply of land perfectly inelastic
• Land Rent is function of demand, and thus an
  Unearned Increment
• Corollary
• If there is no land rent, ground still exists
• Government can tax 100 of land rent with no
  impact on output
• Taxing land rents is neutral tax (Henry George)

4
Land market with perfectly inelastic supply of
land
5
Economic land

• Increased land rents allow more land to be
  cleared or used for production of specific
  output.
• Local planning agencies can manipulate the amount
  of land usable for particular purposes via zoning
• Thus the supply of land is partly upsloping.
• Price-determined rentpure rent
• Price determining rentarea below tipping price
  and above supply curve for land

6
Land market showing pure rent and improvement
rent
Tipping price
7
Demand for land

• Non-residential demand is function of
• Value of cleared agricultural land
• Conversion cost
• Value of accessibility
• Present value of future expected rent increases
  (growth premium)

8
Present value formula

• where A is the expected yearly net income
  generated in a specific location, and
• r is the interest rate.
• The summation sign, ?, means that we add up the
  present value for every year starting from year 1
  and going through year T, the last year we expect
  to own the property.

9
Present Value example

• Assumes net income per year is 10,000
• Interest rate is 6
• Land owner will sell property in 5 years for
  50,000

10
Bid-rent functions and monocentric model

• CBD is market center
• Bid-rent function shows the amount of rent
  required from each type of user at each distance
  from city center
• Normal rates of return to each industry
• Bid-rent functions require equal profits from
  firms competing for a location closest to CBD

11
Intraurban land use

• Bid-rent curves are steepest
• if land can be easily substituted for capital
• the more expensive the cost to transport the
  product
• Accessibility and face-to-face contact is
  important
• the more fertile/profitable the location
• Commercial bid-rent curves steepest
• Agricultural bid-rent curves flattest
• Bid-rent gradient shows maximum amount of rent
  going to landowners regardless of land use

12
Residential location

• Household utility is function of
• Housing quality, size of structure and lot
• Neighborhood amenities, green spaces
• Transportation costs (inverse relationship)
• Composite good (everything but housing)

13
Rent gradient
14
Polycentric urban model

• Land rents decrease with distance
• from CBD, and
• from secondary employment centers on outskirts of
  town

15
Bid-rent functions for polycentric city
16
Edge cities (Garreau, 1991)

• No governing structure, no specific boundaries
• Primary destination for entertainment, shopping,
  recreation
• Formation
• Residences migrate to edge of city
• Shopping centers locate near residences
• Factories and office complexes locate near labor
  source

17
Tysons Corner, CDP
18
Results of urban growth

• Land prices increase in the city
• The city expands in to the rural areas
• Rural areas adjacent to the city growand land
  prices increase
• Urban growth follows transportation corridors

19
Capitalization process

• Amenities and sound local fiscal policies create
  attractive environments and people want to
  migrate to the area
• Demand for land increases (and the land rents
  rise)
• Supply of labor increases, possibly decreasing
  wages
• Relocation continues until the value of the
  benefits from living in an area is capitalized
  into the value of the land.
• Negative externalities cause land values to fall.

20
Hedonic prices

• Method of calculating the values of amenities and
  costs of disamenities.
• Dependent variable price of land
• Independent variables
• Indicator (dummy variables) describing
  neighborhood attributes
• Lot size
• Access to public services
• Proximity to amenity/disamenity
• Coefficients reflect the market value of the
  characteristics.