Lecture 16 The Economics of Land

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Lecture 16The Economics of Land

• AEDE/NR 531
• Spring Quarter, 2006

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• The trouble with land is theyre not making it
  anymore
• - Will Rogers

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Facts About Land-Use in the U.S.

• 1.9 billion acres in the continental U.S.
• 1997
• Urban, recreational, and wilderness lands have
  expanded since WWII.
• Grazing land and forests have declined. Cropland
  has remained steady.

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Facts About Land-Use in the U.S.

• Of the 57.8 million acres of rural land that
  changed land use, 54 was converted to another
  rural land use, 11 to federally owned land, and
  23 to urban land use.
• 25 of the conversion to urban land involved
  prime farmland.
• Conversion of rural land to urban from 1982 to
  1992 represents only about 1 of total rural
  land.
• Concerns over so-called urban sprawl due to the
  disappearance of rural land is not supported by
  data at a national level.
• Data supports sprawl as a societal problem more
  from an inefficient use of social resources
  perspective.

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Economics of Land-Use

• Questions
• How can economic models be used to understand why
  a particular acre of land is allocated to a
  certain use?
• Why have communities in the U.S. arranged
  themselves in different spatial configurations in
  different periods?
• Why has there been an increase in the rural/urban
  fringe in recent decades?

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Efficient Land Use

• Economists always want to achieve efficiency in
  resource use.
• Ask Which pattern of land use is most
  efficient?
• Land rent
• Def
• Socially Efficient Land Use
• Def
• Very different levels of efficiency could result
  because even within small regions,
  characteristics of land parcels differ greatly.

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Efficient Land Use

• How do we seek to achieve efficient land use?
• In the U.S. it is according to the private land
  market.
• Relies on the fact that land owners will want to
  receive the largest return on the land they own.
  Thus, they will allocate it to the highest valued
  option.
• Consider a unit of land allocated to a particular
  use far into the foreseeable future. Where R is
  annual rents and r is the discount rate. the
  Present Value of this stream of benefits is

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Efficient Land Use

• If an acre of land produces 20 worth of crops
  every year, its PV for the next five years if r
  10 would be
• PV
• If the stream of earnings goes infinitely into
  the future, the equation simplifies to
• PV

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Efficient Land Use

• In an open market, the market price for a
  particular use of land will be equal to the
  highest of all the different possible PVRs
  associated with the different ways that land
  could be used.
• Incentives of land owners is often distorted due
  to the presence of land taxes, which are a
  significant source of the total tax base in most
  areas in the U.S.
• Private markets may also be distorted if all net
  benefits are reflected (capitalized) in the price
  of land. This is often the case when land in a
  certain use provides environmental amenities that
  are public goods or produces externalities that
  arent internalized.
• For example, gulf coast land in a wetland state
  provided a benefit to New Orleans residents by
  providing a barrier to storm swells. This was not
  reflected in its price.

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Land Rent and Price Gradients

• Consider the case of urban development.
• Land can be used for commercial (CRG),
  residential (DRG), and agricultural (ARG)
  purposes.
• The land rents for each will be a function of the
  distance the land is from the center of the city.
  
• Commercial land is more valuable closer to the
  center of the city.
• Residential land is also more valuable closer to
  the center of the city, but the drop with
  distance is less than for commercial land.
• Same with agricultural land, but it has the
  slowest decline in price as distance from the
  city increases.
• Critical distances are the points where rent
  gradients cross.

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Land Rent and Price Gradients

d2
d1
City Center
Distance from center of city
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Land Rent and Price Gradients

• At d1, the rents from commercial and residential
  parcels are the same.
• At d2, rents from residential uses equals that of
  agricultural uses.
• Thus, from the center of the city to d1, land
  will be used for commercial uses.
• At d1, land use will change to housing.
• At d2, land use will change from housing to
  agriculture.
• The urban/rural fringe is where land
  transitions from housing to agriculture.
• Geographical characteristics of certain regions
  often make this transition much less smooth.

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A Paradox?

• Then, why is it that in American cities lower
  income households live close to the city center
  while wealthier households live on the periphery?
• Why would the poor live on expensive land and the
  rich live on cheap land?
• We can understand this by employing rent
  gradients
• Remember, rent gradients simply show how much
  someone is willing to pay for varying levels of
  distance from the city center. Can think of
  distance as the quantity of a good.

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A Paradox?

• Consider two people who both prefer living at low
  densities. If their incomes differ, their rent
  gradients will have different slopes.
• The poorer person will have a more steep
  gradient, while the wealthier person has a
  flatter gradient. Why?
• This is because at any given location, the poorer
  person can buy less land than the rich person.
  Since only small quantities of land are involved
  for the poor, changes in its price are not as
  important for them as the costs of commuting.
• The rich person buys greater quantities of land
  and thus is more sensitive to the price of land
  than they are to commuting costs.

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Brief History of Spatial Arrangement of
Communities

• Archaeological evidence shows within 1,000 years
  of the adoption of agricultural methods in
  particular regions, cities developed. Requires
  excess food.
• Until the Industrial Revolution, 70 to 80 of the
  worlds population was engaged in agriculture.
  Only 10 lived in cities of more than 5,000
  people. The IR resulted in massive urbanization
  first in Europe and then in Asia and Africa after
  1900.
• Global urbanization is projected to be 44 in
  2000 and 57 in 2025.
• So, in 200 years, the world will have gone from 1
  in 11 people living in cities to one in which
  half do.

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Brief History of Spatial Arrangement of
Communities

• In the U.S., there has been much more variance in
  both the relative size of large cities to small
  cities and which cities are large compared to
  other regions of the world.
• Size distributions of cities in Japan and France
  remained constant through the 20th century. In
  fact, the 20 largest cities in France in 1810 are
  primarily the 20 largest in 1975.
• New Orleans was the 5th largest city in the U.S.
  1860 and was the 30th largest in 1980.
• It is difficult to understate the importance of
  labor mobility in understanding land use in the
  U.S., particularly compared to Europe and other
  regions.
• In 1990, 77.5 of the population lived in
  metropolitan areas.

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The Economics of Urban Sprawl

• Sprawl refers to the recent growth in the
  rural/urban fringe. While it used to be a line
  in the shape of a circle, now its a donut.
• Characterized by low-density housing
  developments.
• Note that the previous model shows transition
  from high price commercial land near the city
  center to lower priced low-density housing.
• Sprawl results when the housing rental/land-price
  gradient has an overly shallow slope. Thus, land
  further and further away from the city center is
  developed for housing.

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The Economics of Urban Sprawl

• Leapfrogging
• Developers go past the current fringe where land
  is even cheaper projecting a further widening of
  the fringe barrier.
• The ag/forest land between housing areas often
  then loses some value it would have in an
  ag/forest use thus increasing the likelihood it
  is used for housing.
• Edge Cities
• The growth of the fringe is accentuated by edge
  cities, which are new smaller urban centers
  around the main urban center that push housing
  further into rural land.

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Efficient Levels of Sprawl

• Costs
• Lost natural resource values of the land that
  comes under urban pressure, as well as added
  costs of living in geographically disperse
  communities.
• Benefits
• Allows people to live in single family owns with
  reasonably sized lots, which is something that a
  sizeable portion of the population desires.
• Externalities
• Because road access is typically not priced in
  the U.S., and car pollution is not taxed,
  transportation costs are likely lower than is
  optimal. Also, all public services become more
  expensive with increased distance. Sometimes this
  isnt priced properly.
• Subsidies
• Federal and state tax laws lower liabilities for
  home-owners possibly contributing to increased
  sprawl.

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Policies for Controlling Sprawl

• Large-lot zoning
• Requires all houses to have a minimum total
  acreage.
• Development Borders
• Draw a circle around the city outside of which
  development is limited.
• Used in Toronto and Portland, Oregon.
• Central City Traffic Charges
• London recently enacted a central city zone that
  charges cars for entering. Used to deter people
  from living outside the city and driving in to
  the center. Increases transportation costs thus
  making the gradient more steep.

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• The outcome of the city will depend on the race
  between the automobile and the elevator, and
  anyone who bets on the elevator is crazy
• -Frank Lloyd Wright