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Chapter 6 Urban Land Rent

Chapter 6 Urban Land Rent. Introduction to Land Rent. Market value: amount paid to take ownership Land rent: periodic payment from user to owner. Introduction to Land Rent. WTP for hectare of land = Total revenue - non-land costs Bid rent per hectare = WTP divided by lot size.

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Chapter 6 Urban Land Rent

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  1. Chapter 6 Urban Land Rent

  2. Introduction to Land Rent • Market value: amount paid to take ownership • Land rent: periodic payment from user to owner

  3. Introduction to Land Rent • WTP for hectare of land = Total revenue - non-land costs • Bid rent per hectare = WTP divided by lot size

  4. Bid Rent curves for the manufacturing sector • WTP: Maximum amount for lot large enough for production facility • WTP = Total revenue - non-land costs • One part of non-land cost is cost of freight to highway • Bid rent per hectare = WTP divided by lot size

  5. Axiom 1: Price of land adjusts for locational equilibrium • Each firm earns zero economic profit after paying for land • Variation in freight cost are exactly offset by variation in land rent

  6. Bid Rent curves for the information sector • Office firms gather, process, and distribute information → incentive to cluster • Principle of median location: Travel distance minimized at median location • Total travel distance increases at increasing rate as distance to center increases

  7. Office Bid Rent curve with a fixed lot size(without Factor Substitution) • WTP = Total Revenue - non-land costs • One part of non-land cost is travel costs of office workers • Bid rent per hectare = WTP / size of production site

  8. Office Bid-Rent curve with Factor Substitution • Capital and land are input substitutes in production of office space • Building up increases capital cost and decreases land cost • Capital costs increase with building height • Vertical transportation systems • Reinforcement for weight bearing

  9. Choosing a Building Height • Which point of the isoquant minimizes the building cost. • Lets continue our example (table 6-5) adding land rent. • Will see how as land price ↑ firms will substitute Land for K.

  10. Low Rent ($40): Short building is least costly Medium Rent ($200): Medium building is least costly High Rent ($1600): Tall building is least costly Choosing a Building Height

  11. Office Bid Rent with Factor Substitution • WTP = Total Revenue - non-land costs • One part of non-land cost is travel costs of office workers • Bid rent per hectare = WTP / size of production site

  12. Without factor substitution we get a concave Bid-Rent curve. • With factor substitution we get a convex Bid-Rent curve

  13. Moving Closer to the Center • Move from 5 blocks from center to 1 block from center • Point e. Four story building (efficient). Bid-Rent = $200. • Savings in travel cost: point e to point a; ∆ Bid = $656 • Savings from factor substitution: point a to j; ∆Bid = $744 • Result: ∆ Bid rent exceeds the decrease in travel cost

  14. Moving Farther from the Center • Move from 5 blocks away from center to site farther away • Increase in travel cost decreases bid rent • Factor substitution saves cost and increases bid rent • Result: ∆ Bid rent is less than the increase in travel cost

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