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Chapter 6 Urban Land Rent - Urban Economics 6th Edition


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Urban Economics 6th Edition by Arthur O'Sullivan.
This is a brief presentation of Chapter 6. Urban Land Rent, with some cases from Indonesia and some other parts of the world.

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Chapter 6 Urban Land Rent - Urban Economics 6th Edition

  1. 1. John William GirsangParamita Estihandayani 5 October 2012
  2. 2. Chapter Outline • Explaining why the price of land varies within cities and show the connection between expensive land and tall buildings. • In this chapter, urban economy is divided into 3 sectors—manufacturing, offices, and households— and see how much each sector is willing to pay for land in different parts of the city. • Land usually goes to the highest bidder, so once we know how much each sector is willing to pay for land, we can predict what goes where.
  3. 3. Introduction to Land Rent Land rent vs. Market value • Land rent is the periodic payment by a land user to a landowner. • Market value of land is the amount paid to become the land owner. • Price of land is land rent, a periodic payment to a landowner. • This is sensible because many other economic variables are expressed as periodic payments, including household income, firm profits, and interest payments.
  4. 4. Deriving the Simple Bid-Rent Curve (Agricultural Land) Price of Corn Quantity Produced Total Revenue Nonland Cost WTP for Land Bid Rent for Land Low Fertility $10 2 $20 $15 $5 $5 High fertility $10 4 $40 $15 $25 $25 • The idea here is that the more fertile (or productive) land commands a higher rent • In farming, productivity is based primarily on soil quality, but this location specific, not all places are equally productive. • In other industries, productivity may be based on access to transportation or other companies in similar business.
  5. 5. Describing the Leftover Principle • Competition among producers leads to a bidding process for the land. • Producers bid more for land that can produce more. • This drives economic profits to $0, i.e., all costs are covered, along with the wages of the producer. • This means, the land owner gets whatever is ‘left over’ once all other factors of production are paid.
  6. 6. Bid Rent Curves for the Manufacturing Sector Distance Total Revenue Nonland Production Cost Freight Cost WTP for Land Production Site (hectares) Bid Rent (per hectare) 0 $250 $130 - $120 2 $60 1 $250 $130 $20 $100 2 $50 2 $250 $130 $40 $80 2 $40 3 $250 $130 $60 $60 2 $30 • Price adjust to generate locational equilibrium • Variations in the bid rent for land make firms indifferent among all locations. Differences in freight cost are exactly offset by differences in land rent.
  7. 7. Deriving the Simple Bid-Rent Curve (Manufacturing) • If we look only at ground transportation for manufacturing, we can develop a bid-rent curve that declines with distance from a major highway. • At each location, rents adjust for the manufacturer to generate $0 economic profit. • According to the graph, what is the maximum distance away form a major highway that a manufacturer will locate?
  8. 8. Information Sector Keyword: central place, office space
  9. 9. Bid Rent Curves for the Information Sector • In the information sector, access to other firms in the sector is important, and access is determined by travel distance. • Firms located at the center of a region travel less than those at the edge. • Firms located away from the center see costs of travel increasing at geometric rate. i.e. not a linear rate.
  10. 10. Office Bid-Rent Curve with a Fixed Lot Size • As we move away from the center, travel cost increases at an increasing rate, so rent decreases at an increasing rate. • Differences in the cost of travel for information exchange are fully offset by differences in land rent, so economic profit is zero at all locations.
  11. 11. Office Bid-Rent Curves with Factor Substitution
  12. 12. Building Options: The Office Isoquant • An office firm bases its choice of a building height on the trade-offs between the costs of land and capital. • A firm will use less land as land becomes more expensive. The will substitute capital, which is the same price everywhere and movable. • A taller building requires more capital because it requires extra reinforcement to support its concentrated weight, along with extra equipment for vertical transportation (elevators). Tall Medium Short Land (ha) 0.04 0.25 1.0 Building Height (floors) 25 4 1 Capital cost ($) 250 100 50
  13. 13. Factor Substitution: Choosing a Building Height • Factor substitution increases the slope of the bid-rent curve • Land is more expensive closer to the center, so it will be rational to occupy a taller building. • Because of factor substitution, the bid rent decreases by an amount less than the increase in travel cost.
  14. 14. Housing Prices Assumptions: 1. The cost of commuting is strictly monetary, a cost of $t per mile. We ignore the time cost of commuting. 2. One member of each household commutes to a job in an employment area, either the CBD or a manufacturing district. 3. Non-commuting travel is insignificant 4. Public services and taxes are the same at all locations. 5. Amenities such as air quality, scenic views, and weather are the same at all locations.
  15. 15. Linear Housing-Price Curve: No Consumer Substitution • A ‘standard’ house is 1,000 SF. • An average household has $800 allocated to rent. • Commuting costs are $50 per mile per month. • At a distance of 4 miles, a house will rent for $600 and commute costs will be 4 x $50 or $200 for a total $800. • At a distance of 10 miles, a house will rent for $300 and commute costs will be 10 x $50 or $500 for a total $800. • There is no utility difference between locations (equilibrium). However, consumers are free to substitute a smaller house as they move toward the employment center. (cont’d)
  16. 16. Consumer Substitution Generates a Convex Housing-Price Curve • As the price of housing (i.e., land) per sq feet rises, people can consume fewer sq feet. Housing size is not perfectly inelastic. • This means people near employment centers consume fewer square feet and substitute toward other consumer goods with lower (opportunity) costs. • The leftover principle still applies here. Because people use fewer sq feet, they can now afford to pay more per sq feet. • So, with factor substitution, price of housing rises more quickly as you approach the employment center. • At a distance of 10 miles, a house will rent for $300 (3x1000SF) and commute costs will be 10x$50 or $500 for a total of $800. • At a distance of 5 miles, a house will rent for $550 (0.8 x approx 687.5 SF) and commute costs will be 5x$50 or $250 for a total of $800.
  17. 17. Residential Density • Consumer substitution. The price of housing increases, and households respond by consuming fewer sq feet. • Factor substitution. Housing firms respond to higher land price by using less land per unit of housing. Housing (sq feet) Land per Sq foot of Housing Land per Household (sq feet) Density (households per ha) Suburb 2,000 2 4,000 8 City center 1,000 0.10 100 320 Putting these two factors together, the city-center uses 100 sq feet of land, while the suburbanite uses 4,000 sq feet. Therefore, this example, population density is 40 times higher in the central city.
  18. 18. Land Use Patterns
  19. 19. Bid Rent of the Office Sector
  20. 20. Bid Rent of the Manufacturing Sector
  21. 21. Maximum Bid Rent of Employers
  22. 22. Territories of Different Sectors • Land is occupied by the highest bidder, and the intersection of the bid-rent curves of office firms and office workers shows the boundary between the business and residential area, x1. • Boundary between office workers and manufacturing workers occurs where the bid-rent curves of the two worker types intersect, at x2. • Manufacturing firms outbid their workers for locations between x3 and x5, defining manufacturing district. • The area which manufacturing workers outbid their employers and a non urban land use (agricultural), is between x5 and x6.
  23. 23. Thank You 05.05.12