URBAN LAND RENT AND LAND USE PATTERNS

Bid rent theory

•David Ricardo
•Von Thunen
•Alonso
Definitions:
Land rent
•Periodic payments of user to owner
Market value
•Amount of money to become a landowner
Willingness to pay (WTP)
•The maximum amount a person is willing to pay

Main determinants for land prices

• Agriculture (rural area): Fertility of the land
• Manufacturing firms: Accessibility to consumers or suppliers
• Office firms: Accessibility to information
• Households (housing): Accessibility to workplaces

1. Agriculture: David Richardo (1821)

•Rent is determined based on the earning by using land
•Price of agricultural land = fertility
•Example (Corn price = Rs.15)
Quantity Total revenue Non-land cost WTP for land

Low Fertility 4 15 * 4 = Rs.60 Rs.40 Rs.20

High Fertility 8 15 * 8 = Rs.120 Rs.40 Rs.80

How much is the bid rent?

Leftover principle (From Ricardo)
 •No restriction on entry
• Access to the same technology and inputs
•Competition will bid up the price of land until the economic profit becomes zero
•The land owner will get the leftovers (total avenue- nonland cost)

Quantity Total revenue Non-land WTP for land BID RENT

cost

Low Fertility 4 15 * 4 = Rs.40 Rs.20 Rs.20

Rs.60
High Fertility 8 15 * 8 = Rs.40 Rs.80 Rs.80
Rs.120

2. Bid rent for the manufacturing sector (Urban setting)

•Accessibility rather than fertility
•Imagine a manufacturing firm (e.g., Bicycles)
Land
Labor
Import parts & export outputs by truck on a highway
Price of bike is determined in the market and is not affected by changes in city
Manufacturing firms
Rent per hectares = WTP (total revenue- nonland cost- freight cost) / Lot size
Firm Distance Total Non-land Freight WTP for Area BID
revenue cost cost land (hectares) RENT

A 0 Rs.300 Rs.150 0 Rs.150 2 Rs.75

B 1 Rs.300 Rs.150 Rs.30 Rs.120 2 Rs.60
C 2 Rs.300 Rs.150 Rs.60 Rs.90 2 Rs.45
D 3 Rs.300 Rs.150 Rs.90 Rs.60 2 Rs.30

What can you see? Freight cost (distance) vs. bid rent
Empirical evidence (Sivitanidou and Sivitanides, 1995)
Higher rent in industrial areas where
•High freeway density
•Close intersections of major freeways or airport

3. Bid rent for the information sector [Office firms]

Consider office sector…

•What is the most important factor? Information!!!

•Still face to face contact is essential

•Clustered in certain areas to share information

Bid rent for office

Assumptions for an example

•Seven firms in a central business district (CBD) area

•Located one block apart
•Travel to each the other firms to exchange info
•Make a separate trip to and from each firm

The median location minimizes total travel distance

 Office Bid-Rent curve

Assumptions for an example

•Leftover principle
•5 story building on 1/5 hectare of land
•Total revenue per day is Rs.600
•Two types of production costs: Rs.300
Capital cost of the building: Rs.120
Other costs including labor, inputs: Rs.180
•Travel cost: Rs. 10 + a (with a increasing rate)

Rent per hectare = (600 – 120 – 180 – 0) / 0.2 = Rs.1500

Distance Total Capital Other Travel WTP for Area BID

revenue cost Costs Cost land (hectares) RENT

0 Rs.600 Rs.120 Rs.180 0 Rs.300 0.2 Rs.1500

1 Rs.600 Rs.120 Rs.180 Rs.35 Rs.265 0.2 Rs.1325
3 Rs.600 Rs.120 Rs.180 Rs.80 Rs.220 0.2 Rs.1100
5 Rs.600 Rs.120 Rs.180 Rs.200 Rs.100 0.2 Rs.500
4. Residential bid-rent curve
•The bid-rent of housing producers for land
•It depends on how much people are willing to pay for housing

Housing price curve

Assumptions
•Commuting (22% passenger trips & 27% passenger vehicle miles travelled in
2001- Hu and Reuscher, 2004) is a key location factor and cost is strictly
monetary
•One worker of each household commutes to CBD or a manufacturing district
•Non-commuting trips are insignificant
•All locations have the same conditions (i.e., tax, air quality…)
Housing prices
Assumptions for an example

•Housing units with 1,000 square feet

•Fixed amount (Rs.800) on housing and commuting
•Commuting cost: Rs.50 per month per mile
•Housing price: price per square foot per month
Generalized relation between housing price and travel cost
ΔP (price of housing) * h (housing consumption) + Δx (distance) * t (cost per
mile) = 0
That is,

Residential density
• Consumer substitution
As the price of housing increases, households will consume fewer square
feet
•Factor substitution
Firms will use less land per unit of housing as land price increases
Population density increases as we approach to employment areas