Regional Economics - Part I - Theories of local development (Physical metric space)

Land Demand and Rent Formation

T_D = how much I am willing to pay for a quantity T of land. Demand for land exists until T’, then, no one is willing to pay. The volume of Rent can’t be equal to P* in the point D, because the C is higher.

The green part (unsold) is the part of the city that remains unsold. There is NO DEMAND because the constructor is not willing to sell his lands for a price that doesn’t cover the production cost. He prefers to keep it unsold.

Assumption: DEMAND INCREASE

All the territory can be sold and occupied, so the demand increases. Prices increase because of competition due to SCARCITY.

La “terra” è offerta fino a qui. Perché è come se il landowner dicesse che vende le case fino ad una certa zona. Prima avanzava del terreno non venduto. Adesso la D’ copre tutta la zona offerta.

T2 General condition for the FORMATION OF RENTS:

1. First condition: SCARCITY of the good (in this case land) this means having a RIGID SUPPLY.
2. Second condition:

HIGH DEMAND - this is the reason why in big cities the rent is high.

There is a third condition: GOODS CAN'T BE SUBSTITUTED. Because if substitution is possible, there is no more scarcity.

The construction sector works in a monopolistic way.

In the city there is SCARCITY OF LAND and in general, there is high demand.

NO POSSIBILITY TO SUBSTITUTE (you can't change the city) - Reason why rent in urban context is high, you can't just pay for the production cost, you pay for scarcity.

The larger the city, the higher is the price of land (rent) because of the high demand.

RICARDO MODEL (1810-1820)

It's a theory of RURAL LAND RENT.

The model is based on the concept of FERTILITY, while Vön Thunen's model was about ACCESSIBILITY and Alonso's model about PRODUCTIVITY AND UTILITY.

Both Vön Thunen and Ricardo explain RENT as a result of difference between 2 points in space.

In Vön Thunen - Rent due to different distance (∆ accessibility)

from the centre.

• In Ricardo → Rent is influenced by the different levels of fertility.
• Ricardo's model was formulated after the industrial revolution → new social classes:
  • Labour class
  • Entrepreneurs class
  • Landowners (they receive rent as a remuneration for "doing nothing").

Aim: Ricardo explains the way in which INCOME IS DISTRIBUTED among social classes (production factors L, K, T). So he explains how income is divided between the social classes involved in its production, so between wages, profit and rent; and so also explains how the economic laws concerning the emergence of rents jeopardize the subsistence of capitalism.

WHY → y (what is produced, INCOME) is divided amongst: W (fixed), π (fight between the two classes of entrepreneurs and landowners), R (fight between the two classes of entrepreneurs and landowners).

And HOW → y should be divided.

Assumption:

1. Land is characterised by

In the graph, the “x” axis represents land, and it is ordered according to a decreasing level of fertility. The closer the land is to the center, the higher the level of fertility.

Very fertile land Low fertility

FERTILITY= [y/T] —> Output/m²

2. Land rent on marginal land (the least fertile or least accessible land) is ZERO.

3. Land rent emerges from a differential. A difference in the level of fertility with respect to marginal land.

Process:

In this model, Ricardo analyzes the agricultural sector. First, the most fertile lands are calculated, and then progressively the least fertile soils.

Ordering lands in decreasing order of fertility, it is possible to draw the curve of MPL (marginal product of land).

MPL= Marginal Product of Land)= it is the additional products that the landowner gets if they cultivate a new piece of land. It is the EXTRA OUTPUT obtained by using one more unit of land.

MPL = dy/ dT —> the slope of the

‘c’ receives a Rent= 0. The total rent paid to the landowner is equal to the area abe. All the lands between ‘d’ and ‘c’ receive a rent whose value is equal to the differential productivity of those lands with respect to land ‘c’. What remains left after subtracting W and R, is the PROFIT earned by the agricultural entrepreneur. So W + π + R are together the remuneration of the production factors. (E + K + L)

SITUATION 2 —> GROWTH IN ECONOMY

If a growth in economy happens the SUPPLY for the goods D increases —> D”. It is therefore necessary to utilize more land, that is less fertile, because we shift rightwards. More workers are necessary too, and they will be paid with the total wage dmhw. Wage/ capital remains constant but total W increases. Rent increases. Land ‘c’ is no more paid ZERO. Now land ‘m’ is paid ZERO. If the supply increase: Marginal land is now ‘m’. Rent increases.

—> this is an advantage for landowner.- Profit decrease. The are e’fhw is smaller than the previous one ebnw.

Extreme situation:So IF D increases it is an advantage for the landowners.You can’t have a situation when both π and R increase.The limit situation when D increases excessively, may lead to a crisis, because there isno more profit for the agricultural entrepreneur. Agricultural entrepreneur could stopproduction and exit from the market.

But in this situation, landowners receive, due to scarcity of fertile lands, a growing shareof the total production (GDP). The solution according to Ricardo, was to abolish duties an imports of cheap corn fromabroad, but this was strongly opposed by the lobby of landlords.

We have 3 problems:

1. The fact that 2 km away from Milan has the same value rent as 2 km away from Bergamo, this doesn’t happen inreality
2. In Ricardo only additional space gives advantages to the landowner —> the most peripheral land has a

dif-ferent degrees of fertility.

MARX (1860)

While Ricardo, Alonso and Vön Thunen sign a value to the rent considering a micro-territorial differential, Marx based his land rent theorization on a macro-territorial concept, that is the ABSOLUTE RENT.

Alonso -> Rent as a ∆ PRODUCTIVITY and UTILITY

Vön Thunen -> Rent as ∆ DISTANCE and ACCESSIBILITY

Ricardo -> Rent as ∆ FERTILITY

Marx -> Rent is determined also by the ABSOLUTE RENT

The ABSOLUTE RENT refers to an AGGREGATE and MACRO-TERRITORIAL view of the city. It's the consequence of the advantages provided by Urban context (the so called urbanization economies).

URBANIZATION ECONOMIES are, indeed, economic advantages that increase with the size of the city and with the level of public infrastructures provided in the city.

DIFFERENTIAL RENT = p/m² coming from the different posi-tion/ fertility/ ... of the land with respect to the center.

ABSOLUTE + DIFFERENTIAL RENT

The marginal land

has Rent = r + r (differently from Ricardo)agrabsAGRICULTURAL RENTCENTER

r = r + r + r If we consider 2 points of the city, like A and B, the only(Milan) agr diffA abs component of rent that change is the differential rent.

r' = r + r + r(Paris) agr diffB abs

ABSOLUTE RENT

Is the value of land rent which is independent from the position of the land with respect to the distance from the citycentre.

When you buy a house in Milan, you pay the rent with respect to:

• the position
• The characteristics of the city

ABSOLUTE RENT= it represent the advantageliked to having a base in a better location

r’ r r r= + +agr diff abs

Here you pay a part of the price becauseof the particular characteristic of the place

Both in the large city and in small city you pay a similar price concerning the distance from the centre.

r is the difference in land rent due to distance from the centre.

dAbsolute rent is the fixed component of rent in a city, that is due to the particular advantages of being inthat city.

According to Marx, the end of the city has a value. The value of rent in that point is = +agr abs

Process:

According to Ricardo, R in marginal land= 0. According to Marx, the landlord would never give away hasland for free, so instead of having R= 0, he withdraws that land and creates scarcity. Scarcity triggers the in-crease in a land rents.

So, according to Marx the land in the margin of the city has a rent>0 . The rent of the land at the margin ofthe city has a value that is higher than the rent of rural land. Marx called this rent “ABSOLUTE LAND RENT”.

Conclusion: r rIn order to have the real value of land we have to sum the +diff abs.

Alonso and Vön Thunen said the extreme border of the city starts the rural land.

Rural: only agricultural