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

2. 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)

3. 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. 4 Land market with perfectly inelastic supply of land

5. 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

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

7. 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. 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. 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. 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. 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. 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. 13 Rent gradient

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

15. 15 Bid-rent functions for polycentric city

16. 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. 17 Tyson’s Corner, CDP

18. 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

19. 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. 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.