Unit 3 Urban Land and Building Economics

MUNICIPAL TAXES
Tax:
Taxation is money paid to the Government by individuals and businesses. This
UNIT – III URBAN LAND AND BUILDING ECONOMICS
money is usually spent by the Government on essential services such as health

or education.

To tax is to impose a financial charge or other levy upon a taxpayer (an
individual or legal entity) by a state or the functional equivalent of a state such
that failure to pay is punishable by law.
• Taxes are also imposed by many subnational entities.
• may be paid in money or as its labour equivalent
• A tax "is not a voluntary payment or donation”,
• "any contribution imposed by government - under the name of toll,
tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply,
or other name.”
From the view of economists, a tax is a non-penal, yet compulsory transfer of

resources from the private to the public sector levied on a basis of
predetermined criteria and without reference to specific benefit received.
Purposes and effects:
 Governments use different kinds of taxes and vary the tax rates.
 This is done to distribute the tax burden among individuals or classes of the
population involved in taxable activities, such as business, or to redistribute
resources between individuals or classes in the population.
 Historically, the nobility were supported by taxes on the poor; modern
social security systems are intended to support the poor, the disabled,
or the retired by taxes on those who are still working.
The Four "R"s
Taxation has four main purposes or effects: Revenue, Redistribution,
Repricing, and Representation.

1. Revenue: taxes raise money to spend on armies, roads, schools and
hospitals, and on more indirect government functions like market regulation
or legal systems.
2. Redistribution: Normally, this means transferring wealth from the richer

sections of society to poorer sections.
3. Repricing: Taxes are levied to address externalities: tobacco is taxed, for

example, to discourage smoking, and a carbon tax discourages use of
carbon-based fuels.
4. Representation: The American revolutionary slogan "no taxation without

representation" implied this: rulers tax citizens, and citizens demand
accountability from their rulers as the other part of this bargain.
Proportional, progressive, and regressive
 An important feature of tax systems is the percentage of the tax burden as it
relates to income or consumption.
 The terms progressive, regressive, and proportional are used to describe the
way the rate progresses from low to high, from high to low, or
proportionally.
A progressive tax is a tax imposed so that the effective tax rate increases as
the amount to which the rate is applied increases.
The opposite of a progressive tax is a regressive tax, where the effective tax
rate decreases as the amount to which the rate is applied increases.
In between is a proportional tax, where the effective tax rate is fixed, while
the amount to which the rate is applied increases.
The terms can also be used to apply meaning to the taxation of select
consumption, such as a tax on luxury goods and the exemption of basic
necessities may be described as having progressive effects as it increases a tax
burden on high end consumption and decreases a tax burden on low end
consumption.
Direct tax and Indirect tax
Taxes are sometimes referred to as direct taxes or indirect taxes. The meaning of
these terms can vary in different contexts, which can sometimes lead to
confusion.
 An economic definition, by Atkinson, states that "...direct taxes may be
adjusted to the individual characteristics of the taxpayer, whereas indirect
taxes are levied on transactions irrespective of the circumstances of buyer
or seller."
for example, income tax is "direct", and sales tax is "indirect“.
Direct tax:
A tax placed directly on an individual or business
 Income tax - taken out of an individuals wage
 Corporation tax - paid by businesses out of their profits
Indirect tax:
A tax placed on a good or service
 VAT - this is put onto the price of most goods and services, usually
17.5%
 excise duty - extra tax imposed on certain products e.g. Petrol, cigarettes
and alcohol
Several studies have shown that direct taxation (such as income taxes)
generates the greatest degree of accountability and better governance, while
indirect taxation tends to have smaller effects.

Municipal Taxes

The taxes as specified in the municipal laws of various States may be
categorized as follows :
Land-based Taxes
(1) Property Tax – by whatever name called
(2) A Duty on Transfers of Property, in the form of a surcharge on the duty
imposed by the Indian Stamp Act, 1899
(3) Street Tax (in Mumbai only)
Taxes/Service Charges on Government Properties

(4) Provisions as made in the municipal laws
(5) Provisions made under various Port Trust Acts and under the Railways
(Local Authorities Taxation) Act, 1941
(6) Service Charges as levied under orders of the Union Ministry of
Finance
Municipal Taxes

Taxes related to Services or Performance of Statutory/Regulatory Roles
(7) Water tax

(8) Water Benefit Tax (in Mumbai only)
(9) Sewerage Tax (or Sanitary Tax or Cess, Latrine Tax, Drainage Tax, etc.)
(10) Sewerage Benefit Tax (in Mumbai only)
(11) Conservancy Tax (or Scavenging Tax)
(12) Lighting Tax
(13) Building Tax (in Tamil Nadu and Punjab versus Building Permit Fees
in other States)
(14) Education Tax/Cess
(15) Fire Tax
Municipal Taxes

Taxes on Businesses, Professions and Entertainments
(16) Advertisement Tax

(17) Tax on Professions, Trades, Callings and Employments
(18) Theatre Tax or Taxes on Cinemas, Circuses, Carnivals, etc.

Taxes on Entry or Exit of Passengers, Goods and Services
(19) Octroi/Entry Tax
(20) Tax on Pilgrims
(21) Tolls
Taxes with a Registration Bias

(22) Tax on animals, horses, carriages, carts, vehicles excluding motor
vehicles, boats, vessels moored at ghats, etc.
(23) Tax on dogs

Development Levies
(24) Betterment charges.
Tamil Nadu Urban Local Bodies Act, 1998
property tax
- basic property tax for the building and land
- additional basic property tax for every building with reference to its
location
- additional basic property tax for every building with reference to its
type of construction
water tax
sewerage tax
education tax
advertisement tax
a duty on transfer of property
tolls on road or bridge
Ethical basis of taxation
Oliver Wendell Holmes, Jr. is "Taxes are the price of civilization".
Views opposed to taxation

 Karl Marx assumed that taxation would be unnecessary after the advent of
communism and looked forward to the "withering away of the state".
 In socialist economies - taxation played a minor role, since most government

income was derived from the ownership of enterprises, and it was argued
by some that taxation was not necessary.
 While the morality of taxation is sometimes questioned, most arguments

about taxation revolve around the degree and method of taxation and
associated government spending, not taxation itself.
Construction labour market:
For a large number of workers, employment in the construction is a seasonal
activity during periods of lean activity in agriculture.

 For every construction project there is a principal employer.
 Different categories of work are given out on a contract basis to work
contractors, usually through public tenders.
 The work contractors in turn engage subcontractors of work.
 These subcontractors are usually skilled workmen who also bring in contract
labour.
 The contract labour market is an unorganized market, and labour supply is
managed through intermediaries on an informal basis.
Situational analysis of construction labour market of Ahmedabad city:
The labour studies have started differentiating between labourers (unskilled or

semi-skilled) and workers (skilled) based on skills, wages earned, working
hours, temporary nature of work, ability and opportunity to negotiate wages in
existing the market.

The objectives of the study are as follow:
1) To document status of living and working conditions of ‘building
workers’ working in Ahmedabad city.
2) To identify areas of advocacy for effective implementation of concerned
laws.
3) To articulate needs and concerns of ‘building workers’.
Primary data is collected between end of October 2008 and January 2009. Of
total 970 labourers from Ahmedabad city,

35.7% are from eastern region and 64.3% are from western region.
72.4% are male labourers and 27.6% are female labourers.
32% are skilled while 68% are unskilled
Major findings:
 There are 658 developers, 59 construction companies, 132 builders and
building contractors, 199 architects and 34 civil engineers registered in

Ahmedabad city. However, except labour contractors, none of the above
deal directly with the labourers or bother about their issues.

Employment possibilities and mode of recruitment:
 The labourers and workers reported more than 432 construction sites in
Ahmedabad city; as per their estimate, the industry is providing
employment to about 43,186 labourers and 8,275 skilled workers.
 The mode of recruitment revolves around labour contractor and they have
larger share and stake in the industry and supplying labour. The problem is
poor enforcement of laws due to loopholes at implementation level.
 The developers / builders assign work to the labour contractors on square
foot basis and assessment of their track record, i.e. quality of work and
whether work is completed within stipulated time.

 The developers are not bothered about whether the contractor is registered
or having license to supply labour.
 In case of legal problem, the developers support labour contractor by
putting him in touch with a lawyer.
Migrant labourers:
 The largest number (60%) is of seasonal migrant labourers; migrating from
5 states, namely Rajasthan, Maharashtra, Uttar Pradesh, Madhya Pradesh and
Bihar. From Rajasthan, number of women is higher.
Wages and employment in a month
 The contractor and labourers are mutually dependent.
 The labourers appointed by the contractor get lesser wages than labourers
form naka.
 The labourer from naka get Rs. 150- 200/- as daily wages while the labourers
employed by a labour contractors get about Rs. 80- 100/-.
 The only difference between them is regularity and consistency in getting
employment and sense of security.
The wages are paid based on skill level and requirement of the work in the
market. Daily wages vary between 90 to 500 rupees.
The situation of women labourers is restricted to defined tasks and low
wages in the industry.
The daily earning of women ranges between Rs.90 and Rs.150/- while
the earning of men ranges between Rs.50 - Rs.500/-.
The major complaints of the labourers are:
1. Lack of basic amenities;
2. Lack of compensation for accidents and death of labourer;

3. Women’s vulnerability;
4. Fearing accidents; and
5. Lack of regular payment.
6. The labour contractors are rather blind towards issues of safety and
better living conditions of labourers, as their main motive is their
profit margin.
Total 56% of labourers live in chawls out of which 80% have facilities of
drinking water, bathroom/toilet and electricity in their room; total 24%
labourers live on the worksites or in open areas/footpaths.

Not more than 10% labourers know about labour union – its role,
importance and functioning.
Not more than 5 out of 970 labourers know about laws, especially none
knows about Minimum Wages Act and 2 other acts for Construction
Labourers.
Very few labourers are aware of legal provisions; as many as 90-95%
labourers avoid litigation.
While discussing about unionising them, they opined that creating and
maintaining labour union is difficult.
There is no precedence or pioneer work done for improving living and working
conditions of these labourers and therefore the importance of organizing them is
the utmost felt need of the hour.
The organization which wishes to take up the work to unionise these labourers
should consider the following aspects –
talking to developers and informing them about labour contractors having

license to supply labour;
talking to contractor – making him more human oriented, explaining
labour costs and advantages of implementation of labour laws
understanding varied nature of work in the industry and having dialogue
with each type of labourer / worker
keeping different levels of skills and availability of labourers for the work
available in the industry
The organization which wishes to take up the work to unionise these labourers
should consider the following aspects –
wide geographic areas to cover with needs of different types of labourers /

workers
Some work is done in case of providing skills and employment to the
labourers but it has very limited impact on the industrial structure or legal
binding.
Looking at unorganized nature of work and industry, strategic planning
should be done at micro level and can be upscaled.
Lack of details about High Court interim order and actions taken by
Department of Labour in Gujarat, the scope for legal intervention should
be assessed and suitable strategies could be developed.
Urban renewal:
Urban renewal is a program of land redevelopment in areas of moderate to
high density urban land use - a mix of renovation, selective demolition,
commercial development, and tax incentives is most often used to revitalize

urban neighborhoods.
Urban renewal can be extremely controversial, and has often involved the
destruction of businesses, the demolition of priceless historic structures, the
relocation of people etc.
Community participation, sustainability and trust – and government
acting as advocate and 'enabler' – is vital for realizing urban renewal
projects
Urban renewal:
Advantages/importance:
Replenished housing stock might be an improvement in quality
Renewal may transition underutilized land and foster sustainability

Improve density and reduce sprawl
Economic benefits and improve the global economic competitiveness of a
city's centre.
Improve cultural and social amenity,
Improve opportunities for safety and surveillance.
Disadvantages:
Urban renewal has also been responsible for the destruction of existing
communities;
lead to social exclusion;
Replacement housing – particularly in the form of housing towers – might be
difficult to police, leading to an increase in crime, and such structures might
in themselves be dehumanizing.
Urban renewal is usually non-consultative.
Urban renewal:
Buissink (1985) had defined six activities about urban heritage conservation and
Renewal that are maintenance, improvement, restoration, rehabilitation
(upgrading), Reconstruction and redevelopment

1. Maintenance: Painting, Repairs; Replacement of decay parts
2. Improvement : Adding new elements: balcony, attic, Bring existing
elements up-to-date
3. Restoration: Abolishing the shortcomings; Replacing old and adding new
elements
4. Rehabilitation: (upgrading) Largely as under “restoration”
5. Reconstruction: Improving and Adjusting the internal structure while
retaining the external appearance
6. Total renewal : (Redevelopment) Partial or total demolition of the
buildings in an (limited) area followed by new construction
Investigation on cultural relics or historical environment, foundation of

database, evaluation of historical or cultural values, monitor management for
influence factors, and planning formulation for urban heritage conservation IS
NECESSARY.
Economic evaluation of Urban Renewal:
JNNURM and AMRUT
Urban Housing:
India has an overall rate of construction of mere 2 houses per 1000 people
annually.
3.5 In urban areas and 0.144 in rural areas. (1970’s)

United Nations Recommendation – 10 houses/1000 persons.
Tremendous pressure:
Growth rate of population:
General India – 2.4 %
Urban areas – 3.8 %
That too in urban areas, it is uneven and unbalanced.
Large metropolitan cities – 8.4 %
3,00,000 – 1,00,000  7.5 %
1,00,000 – 30,000  3.4 %
Tremendous pressure:
Currently in developing countries, in last 25 years  starting industries in
the country side (i.e.,) away from the cities.
The difference here is because,

1. Lack of opportunities, amenities and facilities (education, medical,
etc) in smaller towns and villages.
2. Lack of physical infrastructure.
3. Rural areas do not provide the skilled labour force required by a large
industry.
Urban homeless – squatter settlements:
The illegal occupation of urban land represents man’s acute struggle for shelter
in the developing world.
No site is too slushy, too filthy and too dangerous for a precarious huddle
of huts to be put and for human being to dwell in them.
A large mass of discontented and sullen people, concentrated in a number of
pockets, living against the façade of sky-scrapers and mansions, and nursing
both real and imaginary grievances, is like an ammunition dump which
could explode at the slightest friction.
Rich people  renting out even the servants quarters and garages for
commercial purpose – thus forcing the dhobis, the cobbler’s, the Gardner’s
and the like to squat upon public lands and set up shanty colonies.
Governments side  funds allocated for housing have been inadequate.
Our Approach:
It has to be realized that the challenge with which we are faced is not
merely to demolish a few ‘squatter colonies’, and build tenements, or to
lay roads and sewer lines, or to pass rent control and slum
improvement/clearance legislation, but to reform the forces that govern
the life of the people and give new values to them.
Housing should be recognized as a social need.
10 % of land for EWS plots in DR (Development Regulations)
• Depends on the plot size  Bigger townships.
• Essential to get the sanction.
Here, in our city, we have only the minimum plot size and not the
maximum  it needs to be fixed.
Example:
In greater Bombay (In 1970’s) the actual demand for housing is placed at
about 50,000 dwelling units per year, the rate of construction has only been
between 40 – 50 % of the annual requirement.

It is reported that about 55 % of the households in cities – had only one
room as a dwelling unit.
Income profile:
The reason for the large growth in slum population may be found in the
LIG and eventually prevented people of ordinary means from entering the
conventional housing market in the city.
Around 70 % of the people belong to LIG and EWS.

Capacity to pay for shelter:
Expenditure studies – revealed that the households spend nearly 75 % of
their income to food, clothing, tobacco, fuel and light.

The percentage expenditure on food decreases as income increases.
There is an upper limit upto which most households can pay as house rent or
hire-purchase installments plus service charges.
Cost of housing:
The loans available from HUDCO are in fact the cheapest and most liberal
terms available in India – Today.
These people must be provided with minimal housing, the alternative would
be uncontrolled growth of slum.
Solutions:
1. Housing for the EWS and LIG categories may be treated as a social
housing programme and subsidized by a scheme of cross subsidy by which
we may charge somewhat higher price to affluent sections of the community

and commercial user’s of land.
2. Sites and service scheme:
Where the public authority merely provides developed open plots with
facilities such as common water tap, sewerage, drainage, social facilities,
electricity, sanitary blocks, leveled land on which people build incremental
type of housing using locally available materials and family labour and
gradually improve the dwelling as their income permits.
Problems:
 Non-availability of land (close to those people’s workplace)
 Non-availability of fund.
 Temptation to offer land to higher-income group and commercial
user’s which assure revenue to the authority – both capital and
maintenance.
Suggestions for reducing cost of housing:
Use of locally available materials.
Reducing transportation cost by developing brick kilns close to the
construction site.
Lowering the cost of land through socialization of vacant land.
Pooling experience regarding use of alternative materials and building
methods.
Proper layout of houses adopting the row house plan with common side
walls.
Common sanitary block without jeopardizing the local environment.
Lowering the rate of interest and longer period of amortization (paying
back) through proper refinancing arrangement.
Organizing building material banks from where people can draw materials
on suitable credit terms and there by help built houses on self help basis.
Public authorities are very often tempted to set high standard of
neighborhood facilities, ignoring the paying capacity of the residents.
Demand and Supply:
Market:
In mainstream economics, the concept of a market is
Any structure that allows buyers and sellers to exchange any type of
goods, services and information.
Consist of all the buyers and sellers of a good who influence its price.
It facilitates trade and enables the distribution and allocation of
resources in a society.
Allows any tradable item to be evaluated and priced.
It emerges more or less spontaneously or is constructed deliberately by
human interaction in order to enable the exchange of rights (cf.
ownership) of services and goods.
The exchange of goods or services for money is a transaction.

Perfect and imperfect market:
1. Imperfect market: Buyers and sellers have imperfect knowledge of
market situation regarding price and commodity
2. Perfect market: It has perfect competition.
3. Perfect competition
In economic theory, perfect competition describes markets such that no
participants are large enough to have the market power to set the price of a
homogeneous product.
- There are few if any perfectly competitive markets (Auctioning).
- Perfect competition serves as a benchmark against which to measure real-
life and imperfectly competitive markets.
Characteristics of a perfect market:
Infinite Buyers/Infinite Sellers – Infinite consumers with the
willingness and ability to buy the product at a certain price, Infinite

producers with the willingness and ability to supply the product at a
certain price.
Zero Entry/Exit Barriers – It is relatively easy to enter or exit as a

business in a perfectly competitive market.
Perfect Factor Mobility - In the long run factors of production are

perfectly mobile allowing free long term adjustments to changing
market conditions.
Perfect Information - Prices and quality of products are assumed to be

known to all consumers and producers.
Characteristics of a perfect market:
Zero Transaction Costs - Buyers and sellers incur no costs in making an
exchange [Perfect mobility].
Profit Maximization - Firms aim to sell where marginal costs meet

marginal revenue, where they generate the most profit.
Homogeneous Products – The characteristics of any given market good

or service do not vary across suppliers.
Constant Returns to Scale - Constant returns to scale insure that there

are sufficient firms in the industry.
Supply and demand is the most useful model for a competitive market,
and shows how buyers (citizens) and sellers (businesses) interact in that
market.
Demand:
Potential buyers (Consumers, customers or households) of a good or
service within a market, normally a demand curve is used to represent

the different quantities that buyers would be willing and able to
purchase at different prices.
The higher the price of a

good, the less people will
demand that good. In
other words, the higher the
price, the lower the
quantity demanded.
Supply:
Potential businesses or firms within the market that are willing and able
to supply different quantities of a good or service at different prices,

this can be represented in aggregate by a supply curve for the industry
or market.
This means that the higher

the price, the higher the
quantity supplied.
Producers supply more at a
higher price because
selling a higher quantity at
higher price increases
revenue.
Price mechanism:
The price mechanism or supply and demand is concerned with how buyers and
sellers interact together in order to arrive at a market price.
Where demand equals supply this would be at the “equilibrium price and
quantity”, always found automatically within a perfectly competitive market
when buyers and sellers interact.
The price mechanism is used also to explain how a free market economy or
the private sector allocates resources and determines a market price within
an industry.
Price mechanism:
The equilibrium price and quantity P1 and Q1 is represented by the diagram
above, there is no shortage or surplus within the market (demand equals

supply) and therefore the market is in equilibrium (or balance) with no
upward or downward pressure for prices to rise or fall respectively.
Price mechanism:
Demand:
The demand curve or demand schedule represents the total quantity purchased
by all buyers, in aggregate, within the market at different prices. The law of
demand states that as prices fall the quantity demanded rises and vice versa.
The law or theory of demand states that as consumers we derive satisfaction

or ‘utility’ as a result of consuming a good or service. This varies from
consumer to consumer; you may of course have no utility yourself at all if
you consumed a certain good or service in which case you would not be a
potential buyer. The theory states that as price fall, the utility or satisfaction
rises for the consumer as other substitute goods or services would become
relatively more expensive, therefore consumption would rise as price falls and
vice versa.
As price falls this attracts more consumers into the market as well as causing
existing consumers to buy more, because the good or service is now cheaper.
Price mechanism:
Demand:
The marginal utility is the extra
utility gained by the consumer, by

the consumption of one more unit,
it is normally expected to fall when
consumption rises and vice versa.
 if price fell from P1 to P3 there

would be an extension of the
demand curve as the quantity
demanded would rise from Q1 to
Q3 because of the fall in price.
If there was a price rise from P3
to P1 there would be a contraction
of the demand curve, the quantity
demanded would fall from Q3 to
Q1 because of the rise in price.
Price mechanism:
Demand:
An increase or shift to the right of
the demand curve from D1 to D2 (a

rise in demand at the same market
price P1) would eventually create a
higher price and quantity now
demanded, settling finally at P2Q2
once a new equilibrium is found, due
to a shortage.
A decrease or shift to the left of

the demand curve from D1 to D3 (a
fall in demand at the same market
price P1) would eventually create a
lower price and quantity now
demanded, settling finally at P4Q4
once a new equilibrium is found, due
to a surplus.
Price mechanism:
Factors that cause an actual shift in the demand curve:
As prices rise or fall this would contract or extend the quantity demanded along
the demand curve or schedule, however the following factors, rather than
contract or extend the demand curve, cause an actual shift to the right (increase
in demand) or to the left (decrease in demand) creating a new demand curve, if
this were to happen.
Advertising and promotion

Population of an economy
Expectations of buyers and sellers
Prices of substitute goods or services
Prices of complimentary goods or services
Income of households (size and distribution of incomes)
Tastes and fashions over time.
Price mechanism:
Supply:
The supply curve or supply schedule represents the total quantity of a good or
service supplied in aggregate, by all sellers or firms within the market at

different prices. The law of supply states that as prices fall the quantity
supplied falls and vice versa.
The theory of supply states that as sellers want to maximize profit, a higher
price would encourage existing suppliers to expand output due to more profit
per unit being earned, the rise in price may also attract more firms into the
industry. A lower price would cause existing firms to leave the industry or to
contract production of the good or service due to lower profits being earned.
Price mechanism:
Supply:
Market in equilibrium P1 Q1 where demand D1 equals supply S1

 if price fell from P1 to P2 there would be an contraction of the supply
curve, the quantity supplied falling from Q1 to Q2.
 if price rises from P2 to P1 there would be an extension of the supply
curve the quantity supplied rising from Q2 to Q1.
Price mechanism:
Supply:
an increase or shift to the right of the supply curve from S1 to S3 (a
greater quantity supplied at the same market price P1) would eventually
create a lower price and quantity now supplied (P4Q4) due to a surplus.
 a decrease or shift to the left of the supply curve from S1 to S2 (a smaller
quantity supplied at the same market price P1) would create a higher price
and quantity now supplied (P3 Q3) due to a shortage.
Price mechanism:
Supply:
Factors that cause an actual shift in the supply curve:
As prices rise or fall this would contract or extend the quantity supplied along
the supply curve or schedule, however the following factors, rather than
contract or extend the supply curve, cause an actual shift to the right
(increase in supply) or to the left (decrease in supply) creating a new supply
curve, if this were to happen.
 climate
 price of factors of production
 resource availability
 indirect taxes
 subsidies
 goods in joint supply
 expectations of sellers
 technology
Price mechanism and how it works:
The above diagram assumes the market is in equilibrium, whereby demand
equals supply at point A (P1Q1).

The following would happen should there be an increase or decrease in demand or
supply.
1. An increase in demand from D1 to D3 with supply unchanged at S1 would create a

shortage in the market equivalent to Q4 minus Q1 (or the difference between point
A and G). Suppliers knowing about the shortage and driven by profit motive will
increase prices, buyers knowing there is a shortage would be prepared to pay more for
the good or service therefore putting pressure on prices to rise. The new demand
curve D3 will contract and the existing supply curve S1 will extend as prices rise,
until a new equilibrium price and quantity is found by the market at point C (P3Q3).
2. A decrease in demand from D1 to D2 with supply unchanged at S1 would create a
surplus in the market equivalent to Q1 minus Q5 (or the difference between point
A and D). Suppliers knowing about the surplus and driven by profit motive will
decrease prices in order to avoid rising stock levels, buyers knowing there is a
surplus would be prepared to pay less for the good or service therefore putting
pressure on prices to fall by negotiation. The new demand curve D2 will extend and
the existing supply curve S1 will contract as prices fall, until a new equilibrium price
and quantity is found by the market at point E (P2 Q3)
3. An increase in supply from S1 to S3 with demand unchanged at D1 would create
a surplus in the market equivalent to Q4 minus Q1 (or the difference between
point A and G). Suppliers knowing about the surplus and driven by profit motive will
decrease prices in order to avoid rising stock levels, buyers knowing there is a surplus
would be prepared to pay less for the good or service therefore putting pressure on
prices to fall by negotiation. The new supply curve S3 will contract and the existing
demand curve D1 will extend as prices fall, until a new equilibrium price and quantity
is found by the market at point F (P2Q2)
4. A decrease in supply from S1 to S2 with demand unchanged at D1 would create
a shortage in the market equivalent to Q1 minus Q5 (or the difference between
point A and D). Suppliers knowing about the shortage and driven by profit motive
will increase prices, buyers knowing there is a shortage would be prepared to pay
more for the good or service therefore putting pressure on prices to rise. The new
supply curve S2 will extend and the existing demand curve D1 will contract as prices
rise, until a new equilibrium price and quantity is found by the market at point B
(P3Q3).
Price mechanism:
Example (House market):
 Reduction in interest rate -- result in increase in demand.
 Government giving tax incentives to construction companies to

build more houses --- result in increase in supply.
Price mechanism:
Land Economics:
In a market economy, most of the urban land can be freely sold or purchased.
Thus land economics are concerned about how the price of urban land is
established and how this price will influence the nature, pattern and
distribution of land uses.
Price mechanism:
Land Economics:
The above figure provides some basic relationships between the quantity of
land and its price and assumes that there is a free land market. This market
mechanism follows the standard relationship between supply and
demand, where an equilibrium price is reached.
A quantity of land Q1 would be available at a price of P1. However, what is

particular to cities is that the supply is fixed since there is a limited
amount of available land.
When land is reasonably available (Q1), the price (P1) will be moderate.
Moving towards the downtown the demand rises, land becomes scarcer
(Q2) and its price goes up (P2).
Moving towards the periphery, more land is available, demand drops
(Q3), and so does the price (P3).
Price mechanism:
Land Economics:
Not every type of activities is willing to pay a price P1.
Some may even need a price lower than P3.

High land values impose a more intensive usage of space so a higher
number of activities can benefit from a central location. The logic behind
the construction of skyscrapers is therefore obvious and takes place at
optimal locations of competition for land. Different type of activities, each
having their own land use, are willing to pay different rents.
Definition of land:
• According to Marshall “By land is meant not merely land in the strict sense
of the word, but the whole of the material and forces which nature gives freely
for man’s aid in land and water, in air, light and heat.”
• According to Cairncross, “All free gifts of nature that yield income, eg.
Agricultural land, residential land, mines, fisheries, etc. are included in land.”
we exclude from land, sunshine, rainfall and other natural resources because
the same are not owned or possessed by any single individual.
• M. J. Ulmer has defined land in these words, “Land consists of all economic
goods, wealth supplied by nature, natural resources in their original state.”
Market determined values:
Characteristics of Land
Land, in an economic sense, is defined as the entire material universe outside
of people themselves and the products of people.
It includes all natural resources, materials, airwaves, as well as the ground.
All air, soil, minerals and water is included in the definition of land.
Everything that is freely supplied by nature, and not made by man, is

categorized as land.
Land holds a unique and pivotal position in social, political, environmental

and economic theory.
Land supports all life and stands at the center of human culture and
institutions.
All people, at all times, must make use of land.
Land has no cost of production. It is nature's gift to mankind, which
enables life to continue and prosper.
Land's uniqueness stems from its fixed supply and immobility.
Land cannot be manufactured or reproduced.

Land is required directly or indirectly in the production of all goods and
services.
Land is our most basic resource and the source of all wealth.
Land rent is the price paid annually for the exclusive right (a monopoly) to
use a certain location, piece of land or other natural resource.
People receive wages for work, capital receives interest for investment, and
land receives rent for the exclusive use of a location.
Equity and efficiency require that the local general public, who created land
value, should be paid for the exclusive use of a land site. That Payment is in
the form of a land tax.
When considering world-wide economics, most people think that land rent
contributes only a small insignificant portion of value.
But as societies progress, land has become the predominant force in
determining the progress or poverty of all people within a community.
Land in major or cities is so costly that people are forced to move further
away and travel great distances in order to get to work and social attractions.
In the more developed countries of the world, land rent represents more
than 40% of gross annual production.
Since land is fixed in supply, as more land is demanded by people the rent
will increase proportionally.
Demand is the sole determinant of land rent.
Changes in land rent and land taxes have no impact on the supply of land,
because the land supply is fixed and cannot be significantly expanded.
Definition of 'Land Value'
The value of a piece of property, including both the value of the land itself
as well as any improvements that have been made to it.
Land values increase when demand for land exceeds the supply of
available land, or if a particular piece of land has intrinsic value greater
than neighboring areas (e.g. oil can be found on the land).
Investopedia explains 'Land Value’ (Investors view of land)

Owners of land use land value to determine how much to charge other
parties for its use.
For example, an individual who is renting out several acres of farmland,
for use by ranchers for grazing cattle, will determine an amount to charge
for its use by looking at the market value of the land compared to land
taxes and the capitalization rate.
The land value depends on Proximity (Hurd), location (Marshall),
accessibility (Haig), efficiency of uses in various locations (Ratcliff),
preferences for land, goods and accessibility(Alonso) and rent paying ability
of users (Northam). Each of these theories may be partially valid but none of
them can fully or satisfactorily explain the behaviour of land prices in the
urban land market.
Factors affecting Land values:

No single factor determines land values and the law of supply and demand
does not influence the land market in the same manner as it does other
commodities. Urban land can be distinguished from other goods by its unique
qualities.
1. Land is physically undepreciable and is not influenced by time, while the
quality of virtually all other commodities depreciate with time.
2. Land is not transportable. Even if the use of land can be changed, the
land itself is stationary. As a land cannot be transported, the price of land
is determined by the demand for land in certain areas, not by the
availability and demand for land in the entire region.
3. Land is limited in quantity and its supply cannot be increased. However,
the intensity of land use can be increased. This serves as a substitute for
additional quantities of land.

4. Land is used not only for production purposes but also as a long term
investment or as a mode of savings. The scarcity of land and its physically
undepreciable character make it profitable to hold large reserves without
using it as a factor of production.
Land values are thus influenced by a variety of factors. Apart from those
delineated above, there are certain other aspects like urban growth and
planning and financial decisions which affect land value in a country like
India.
Location of land:
 Land location being specific, it plays a crucial part in determining the
land value.
 The use of land for a particular activity depends on factors like
accessibility, centrality, land use in adjoining areas, and availability of
various amenities and services.
 Central locations command a higher value.
 Environmental factors like health and education facilities, recreation etc.,
apart from other urban amenities like water supply, shopping centres, etc.,
contribute to determining the value of land.
 In the case of residential land use, socio-economic status of the
population residing in the neighbourhood also affect the values
significantly.
Urbanisation or rural-to-urban transition:
 Another significant factor contributing to the high rise of land values is the
initial conversion of land at the periphery of the city from rural to urban
use.
 Such a conversion is usually regulated through complicated procedures
since it requires provision of urban services like water supply, sewerage,
etc.
 The value of such land keeps increasing depending on the provision of
infrastructural facilities in the area.
Land use controls:
 The development plans and the zoning regulations control the land use in
different parts of the city.

 The land earmarked for commercial use generally commands a higher
price compared to the other uses.
 At times, the use of land is diverted from its stated purpose.
 The rigidity or flexibility with which such diversions are permitted by the
authorities can affect land values.
 The building bye-laws and subdivision regulations are also instrumental
in determining the land values.
 The intensity of use permitted in the land in a particular area can also
cause variations in the values of land.
 For instance, a site where a high rise building is permitted will fetch a
higher price than a site where such construction is not permitted even in
the same locality.
Shortage of serviced land:
 The problem of developing countries is not merely one of availability of
urban land but the availability of serviced land.

 Even in cities where there is scope for expansion on all sides, serviced
land is in short supply in relation to demand.
 Acquisition and development of land and providing the necessary services
is a time-consuming process. As such, serviced land in most cities fetches
a high price.
Financial resources:
 Another constraint in developing countries is the scarcity of financial
resources to provide serviced land on a scale that matches the
requirements of the growing population.
 Land owners tend to hold land in anticipation of increase in capital
values and rent.
 The availability of finances and the cost of such acquisitions of land and
buildings can therefore, affect market values.
The combined effect of the aforementioned factors result in increasing values
of land in cities over time.
Utility, Scarcity and Desirability
Land value can be thought of as the relationship between a desired location

and a potential user. The ingredients that constitute land value are utility,
scarcity and desirability. These factors must all be present for land to have
value.
Land that lacks utility and scarcity also lacks value, since utility arouses
desire for use and has the power to give satisfaction. The air we breathe has
utility and is generally considered important, since it sustains and nourishes
life. However, in the economic sense, air is not valuable because it hasn't
been appropriated and there is enough for everyone. Thus there is no scarcity
— at least at the moment. This may not be true in the future, however, as
knowledge of air pollution and its effect on human health make people
aware that clean and breathable air may become scarce and subsequently
valuable.
Factors that Contribute to Land Value
By themselves, utility and scarcity confer no value on land. User desire
backed up by the ability to pay value must also exist in order to constitute
effective demand. The potential user must be able to participate in the

market to satisfy their desire.
The physical attributes of land include

quality of location,
fertility and climate;
convenience to shopping, schools and parks;
availability of water, sewers, utilities and public transportation;
absence of bad smells, smoke and noise;
and patterns of land use, frontage, depth, topography, streets and lot
sizes.
The legal or governmental forces include the
type and amount of taxation,
zoning and building laws,
planning and restrictions.
The social factors include

population growth or decline,
changes in family sizes,
typical ages,
attitudes toward law and order,
prestige and education levels.
The economic forces include

value and income levels,
growth and new construction,
vacancy and availability of land.
It is the influences of these forces, expressed independently and in

relationship to one another, that help the people and the assessor measure
value.
Land Speculation:
The cause of every major business-cycle depression is land speculation.
This fact was discovered by the American economist Henry George 120
years ago.
Speculators buy land because they expect the price to go up in the future.
While waiting for the price to go up, speculators do different things with land.
Some land speculators buy raw or underdeveloped land and just let it sit
until they think the time is ripe for development.
When many speculators are doing this in some area at the fringe of a city,
often developers skip around them to areas further away from the city.
That creates land-wasting urban sprawl, which then requires more roads
and longer water pipers and makes it uneconomical to have public
transportation.
In other cases, when speculators are buying land within a city they expect
to be developed soon, development instead shifts to other, less expensive,
areas, and the speculators lose out.
Society also loses, since that area can stay relatively undeveloped even
though it is within the city.
Land Speculation:
Other land speculators buy land in order to develop, expecting the rise in
land value to be a big chunk of their profits.

That works out well for the first ones to do it, but at the end of the land
boom, when many developers are building and hoping to cash in on the land
bonanza, the land value stops rising.
Those who bought near the top don't get the land gain profit, and even
worse, when the real-estate market crashes, the developers end up with
empty houses and office buildings, and shopping centers they where they
built but folks aren't coming.
The go broke, can't pay back their loans, and the banks fail, making the
economy fall even more.
So the reason land speculation causes depressions is that it raises the land
price too high for those wanting land for actual use.
Speculation adds to the demand for land, making prices go even higher.
Land becomes priced for future use, not present-day use.
So those wanting sites for residences, offices, hotels, factories, and
shopping centers, slow down their investing.
Land Speculation:
Also, during the boom, interest rates that were low start going higher as
the central bank (in the US, the Federal Reserve System) reduces the growth
of the money supply, increasing interest rates.
With costs rising and investment in machinery and construction down, the
economy grinds to a halt.
Workers get laid off, which then decreases demand, and the economy falls
into a recession.
So what causes the depression is the reduction in investment in real estate
and other capital goods, caused by rising interest rates and land prices.
When the economy falls into the depression, real estate prices and interest
rates fall, and now investment becomes profitable, and the recovery starts.
For this to happen, the old bad debts have to be cleared, otherwise the
financial system is clogged with bad debts, as it is now in Japan, and the new
enterprises can't get the credit they need to get going.
It also helps a lot if the barriers to new investment are taken down - that
means eliminating restrictions and taxes on enterprise.
Land Speculation:
What makes land speculation dysfunctional - a cause of economic trouble
- is not really the speculation itself, but the tax system in which it takes place.
The tax systems in the world today mainly tax labor and profits. Some of
the tax money goes to build public works, such as subways, freeways, streets,
roads, public utilities, parks, security, fire protection, and schooling. These
push up land values.
So landowners get a government subsidy in the form of increased rent due
to infrastructure that workers and businesses, not the landowners, are paying
for.
So land speculators profit from this forced transfer of wealth from workers
to landowners, if they guess right on where new development will go.
There is another intervention behind the market-hampering speculation,

and that is, cheap and easy credit.
Land is bought with borrowed money, and when the government
stimulates the economy by over-expanding the money supply, it provides the
fuel for land speculation.
Land Speculation:
Later, when the central bank fears this excessive money is causing price
inflation, they reduce money growth, interest get hiked up, and this stops not
just speculation but also investment, as noted above.
How to stop this crazy cycle? Two things are needed.

1. First, squeeze the profit out of land speculation by having the community
or the government collect the land rent. Land values won't go up if the
owners don't get the future higher rents.
2 Secondly, stop gushing money into the banking system. But this is hard
to do with central banking, since there is no way to know exactly how
much to increase the money supply.
So let the market do it with free- market banking, where the banks issue
private bank notes according to the market demand for them.
To stop disruptive land speculation, we need free banking and the public
collection of rent.

Unit 3 Urban Land and Building Economics

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Unit 3 Urban Land and Building Economics

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MUNICIPAL TAXES

money is usually spent by the Government on essential services such as health

From the view of economists, a tax is a non-penal, yet compulsory transfer of

2. Redistribution: Normally, this means transferring wealth from the richer

3. Repricing: Taxes are levied to address externalities: tobacco is taxed, for

4. Representation: The American revolutionary slogan "no taxation without

indirect taxation tends to have smaller effects.

Taxes/Service Charges on Government Properties

(7) Water tax

(16) Advertisement Tax

Taxes with a Registration Bias

Views opposed to taxation

 In socialist economies - taxation played a minor role, since most government

 While the morality of taxation is sometimes questioned, most arguments

The labour studies have started differentiating between labourers (unskilled or

total 970 labourers from Ahmedabad city,

building contractors, 199 architects and 34 civil engineers registered in

whether work is completed within stipulated time.

2. Lack of compensation for accidents and death of labourer;

labourers live on the worksites or in open areas/footpaths.

talking to developers and informing them about labour contractors having

wide geographic areas to cover with needs of different types of labourers /

commercial development, and tax incentives is most often used to revitalize

Renewal may transition underutilized land and foster sustainability

(upgrading), Reconstruction and redevelopment

Investigation on cultural relics or historical environment, foundation of

3.5 In urban areas and 0.144 in rural areas. (1970’s)

The difference here is because,

between 40 – 50 % of the annual requirement.

their income to food, clothing, tobacco, fuel and light.

we may charge somewhat higher price to affluent sections of the community

The exchange of goods or services for money is a transaction.

market situation regarding price and commodity

2. Perfect market: It has perfect competition.

willingness and ability to buy the product at a certain price, Infinite

Zero Entry/Exit Barriers – It is relatively easy to enter or exit as a

Perfect Factor Mobility - In the long run factors of production are

Perfect Information - Prices and quality of products are assumed to be

exchange [Perfect mobility].

Profit Maximization - Firms aim to sell where marginal costs meet

Homogeneous Products – The characteristics of any given market good

Constant Returns to Scale - Constant returns to scale insure that there

service within a market, normally a demand curve is used to represent

The higher the price of a

to supply different quantities of a good or service at different prices,

This means that the higher

sellers interact together in order to arrive at a market price.

above, there is no shortage or surplus within the market (demand equals

The law or theory of demand states that as consumers we derive satisfaction

utility gained by the consumer, by

 if price fell from P1 to P3 there

the demand curve from D1 to D2 (a

A decrease or shift to the left of

Advertising and promotion

service supplied in aggregate, by all sellers or firms within the market at

Market in equilibrium P1 Q1 where demand D1 equals supply S1

equals supply at point A (P1Q1).

1. An increase in demand from D1 to D3 with supply unchanged at S1 would create a

 Reduction in interest rate -- result in increase in demand.

 Government giving tax incentives to construction companies to

A quantity of land Q1 would be available at a price of P1. However, what is

Not every type of activities is willing to pay a price P1.

Some may even need a price lower than P3.