Chapter 6
Urban Land Rent
McGraw-Hill/Irwin
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Introduction to Land Rent
• Market value: amount paid to take ownership
• Land rent: periodic payment from user to owner
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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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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
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6-5
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
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6-6
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
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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
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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
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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.
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Choosing a Building Height
• Low Rent ($40): Short building is least costly
• Medium Rent ($200): Medium building is least costly
• High Rent ($1600): Tall building is least costly
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6-15
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
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• Without factor
substitution we get a
concave Bid-Rent
curve.
• With factor
substitution we get a
convex Bid-Rent
curve
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6-17
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
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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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