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Land Rents and Land-use Patterns

Land Rents and Land-use Patterns. Chapter 12. Definitions of Rent. Land rent—payment for using land as an input Site rent (ground rent)—earnings associated with a given location (monopoly rent,) Improvement rent—earnings due to building, fertilizer, accessibility

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Land Rents and Land-use Patterns

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  1. Land Rents and Land-use Patterns Chapter 12 1

  2. Definitions of Rent • Land rent—payment for using land as an input • Site rent (ground rent)—earnings associated with a given location (monopoly rent,) • Improvement rent—earnings due to building, fertilizer, accessibility • Contract rent—tenants pay to landlords • Economic rent—the payment above the minimum required to keep a production factor in a specific occupation/industry (any input can earn rents, not just land) 2

  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) 3

  4. Land market with perfectly inelastic supply of land 4

  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 rent—pure rent • Price determining rent—area below tipping price and above supply curve for land 5

  6. Land market showing pure rent and improvement rent Tipping price 6

  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) 7

  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. 8

  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 9

  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 10

  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 11

  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) 12

  13. Rent gradient 13

  14. Polycentric urban model • Land rents decrease with distance • from CBD, and • from secondary employment centers on outskirts of town 14

  15. Bid-rent functions for polycentric city 15

  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 16

  17. Tyson’s Corner, CDP 17

  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 grow—and land prices increase • Urban growth follows transportation corridors 18

  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. 19

  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. 20

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