Economic Assessment of Urban Transformation 30 (I + II Parziale)

Marx's Theory of Absolute Land Rent

Marx's statement: rent on the "marginal" land is positive. In particular, at the periphery of cities, marginal urbanized land gives a rent which is higher than the rent on rural land. Marx called this rent, appearing on all, even inframarginal, lands; absolute land rent.

- Full theoretical recognition.

- Stemming from Marx's reflections.

- At the margin, it is theoretically unconceivable that the marginal land lot has no value at all.

- Rentiers could (see before) restrict the use of land and thereby obtain positive remuneration (=rent).

In this theory there are some contradictions:

I. First contradiction

Absolute rent would stem from "class monopoly". In other pages of Marx's theories, however, he claims that agricultural goods cannot be paid a "fully monopolistic price".

II. Second contradiction

Agricultural goods have, according to Marx, a

The necessity are:

1. Remunerate its users more than the production cost. - Marx's effect - This is in stark contrast with point 2, and also goes against all our knowledge about urban land rent, Marx's reflection concerning marginal lands lending for free (zero rent), as seen before. which (cfr. Alonso, Von Thunen, and Ricardo) has mainly distributional effects.
2. Urban border effect - The empirical findings concerning rents at the border of cities: they are higher than rents on surrounding agricultural land.
3. Fourth contradiction - Finally, in order to sustain this logical chain of reasonings, Marx claims that if agricultural goods were produced with the same mix of capital and labor of other industries, absolute rent would simply vanish.
4. Sraffa's effect - The likely effect of a scarcity of urbanized land that could show up in certain periods of time.

What is left of his idea?

Differences between differential and absolute rent - Differential rent refers to a micro-territorial differential.

among sites- Absolute rent can indeed be found in real data (the accessibility principle alone cannot fully justify differential in accessibility, in an urban context, or in fertility in a rural one.àrent).

- A second intuition useful for urban land rent theories is what’s left even at the city margin, where

- Absolute rent refers to an aggregate, macro-territorial view of the city: it emerges as a consequence values are still positive: there always is a positive demand for urban land, stemming from the pure of the advantages that an urban context provides agglomeration economies, or more specificallyàdesire to live in cities.urbanization economies.

- This in turn can happen because of:

In the urban land case we can distinguish two cases:

1. Land use restrictions, following Marx;
2. Supply element prevails, giving rise to a “scarcity absolute rent”

2. Scarcity of urban land and the durability of the housing stock.

- Demand element prevails, giving rise to an

Absolute rent is driven by the "demand for city". In general, it is generated by the need to benefit from an urban environment (urbanization economies, therefore, both absolute and differential urban rent can be combined for a more comprehensive agglomeration of activities).

Understanding the concept of land rent is important for:

• Strategic analysis and planning
• Capital budgeting and acquisitions
• Firm financing
• Control of performance

Investment appraisal is the economic value, a monetary measure of the utility assigned to a firm's asset. It is important for:

• Strategic analysis and planning
• Capital budgeting and acquisitions
• Firm financing
• Control of performance

An investment is a project that, given an initial allocation of resources, promises:

• The recovery of the initial investment
• A return on the investment, correlated with business risk and maturity, as a reward to invested resources

Typical business projects include:

• Expansion: Should we purchase new plants, properties, in order to expand the operations?
• Substitution: Should we substitute our investments with new ones?
• Automation:

financial immobilization.- The terminal value must be considered at the project maturity (market value, or recovery value,can be different from zero).

Working investment:

• Increase in commercial credits
• Increase in inventory

Cash flows typically affected by a new project:

• Revenues
• Commercial costs
• Labor costs
• Materials costs
• Energy costs
• Maintenance
• Taxes (effect of depreciation)

All contributions may be positive or negative at the margin. The value derives from the comparison between costs and revenues.

Sunk cost (or committed)

It's an awkward concept. Cost that we incurred, and we won't consider anymore. Thus, sunk costs must be ignored. An example is the cost of consultant, because this cost isn't related to the evaluation of incur or don't incur as specific investment, we have to afford it in any case.

Cash-flow discounting

Cash flows discounting

This is the behavior of a good investment: There's an initial cash outflows and a future cash

in-flowsNB: 4me is money, so it’s necessary to evaluate also this variable in the cash flow

tInitial cash Future cash in-flows out-flows (forecast)

Discounting/compounding?

Discounting/compounding

How can we compare such cash flows, referring to different times?

Present value = Cash flow x Discount ratio 1/(1+k)

Present value = Cash flow x Discount ratio 1/(1+k)

Compounded value = Cash flow x Compound ratio (1+k)

Compounded value = Cash flow x Compound ratio (1+k)

Example:

Two alternative offers: (1) € 98,000 immediately;

(2) €103,000 next year

cost of capital k = 3.5%

cost of capital k = 3.5%

Is the investments worthy ?

Is the investments worthy ? 1= × = >PV €103,000 €99,517 €98,000 or,( ) Discounting/compounding

second option + 11 0.035= × = >PV €103,000 €99,517 €98,000 or,( )

second option +1 0.035( )= × + = <CV €98,000 1 0.035 €101,

risk and reward should be proportional. We can consider the opportunity cost of capital as:

k = Risk-free market rate + Risk-premium

• Risk-free market rate: the annual market return offered by investments in short-term sovereign bonds.
• The larger is the market premium the larger the risk perceived by investors in the firm's equity.