Chapter 29 Rent, Interest and Profit. Economic Rent. To the business executive “rent” is a payment made for the use of a building, machine, or warehouse facility.
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What determines the demand for land?
1 – the price of the product grown on the land
2 – the productivity of the land
3 – the prices of the other resources which are combined with land
Figure 29-1 show different demand options. If the demand were D4, land rent would be zero. Land would be a free good. This situation was approximated in the free-land era of U.S. history
Changes in Demand
The perfectly inelastic supply of land must be contrasted with the relatively elastic supply of capital, such as apartment buildings, machinery, and warehouses.
In the long run, capital is not fixed in total supply. The supply curves of these nonland resources are upsloping, meaning the prices paid to such resources provide an incentive function. A higher price provides an incentive to offer more of the resource; a low price, an incentive to offer less.
This is not so with land. Rent serves no incentive function because the total supply is fixed. This is why economists consider rent a surplus payment not necessary to ensure that land is available to the economy as a whole.
Land Rent: A Surplus Payment
Henry George’s Proposal
The single-tax movement gained much support in the late 19th century.
This reform movement maintained that economic rent could be taxed away without impairing the available supply of land or, therefore, the productive potential of the economy as a whole.
A Single Tax on Land
George observed the increasing demand for a resource whose supply was perfectly inelastic. Landlords were receiving fabulously high incomes solely from holding advantageously located land. George believed these land rents should be heavily taxed and the revenue spent for public uses.
A Single Tax on Land
Different pieces of land vary greatly in productivity, depending on soil fertility and such climatic factors as rainfall and temperature.
Such productivity differences are reflected in resource demand and prices.
Location may be equally important in explaining differences in land rent.
Other things equal, rents will pay more for a unit of land which is strategically located than for a unit of land whose location is remote.
Example: the enormously high land rents of large metropolitan areas and at the bases of major alpine ski areas.
Productivity Differences and Rent Difference
We know that land has alternative uses. An acre of farmland maybe useful in raising not only corn but also wheat, oats, barley, and cattle; or it may be used for a house, highway or factory
This tells us that a particular use of land involves an opportunity cost – the forgone production from the next best use of the resource.
Where there are alternative uses, individual firms must pay rent to cover these opportunity costs if they are to secure the use of land for their particular purpose
Alternative Uses of Land