Transcript non-land costs Bid rent per hectare = WTP divided by lot size
McGraw-Hill/Irwin
Chapter 6
Urban Land Rent
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Introduction to Land Rent
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Market value: amount paid to take ownership
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Land rent: periodic payment from user to owner
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Introduction to Land Rent
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WTP for hectare of land = Total revenue - non-land costs
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Bid rent per hectare = WTP divided by lot size
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Bid Rent curves for the manufacturing sector
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WTP: Maximum amount for lot large enough for production facility
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WTP = Total revenue - non-land costs
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One part of non-land cost is cost of freight to highway
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Bid rent per hectare = WTP divided by lot size
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Axiom 1: Price of land adjusts for locational equilibrium
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Each firm earns zero economic profit after paying for land
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Variation in freight cost are exactly offset by variation in land rent
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Bid Rent curves for the information sector
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Office firms gather, process, and distribute information → incentive to cluster
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Principle of median location : Travel distance minimized at median location
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Total travel distance increases at increasing rate as distance to center increases
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Office Bid Rent curve with a fixed lot size (
without Factor Substitution) •
WTP = Total Revenue - non-land costs
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One part of non-land cost is travel costs of office workers
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Bid rent per hectare = WTP / size of production site
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Office Bid-Rent curve with Factor Substitution
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Capital and land are input substitutes in production of office space
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Building up increases capital cost and decreases land cost
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Capital costs increase with building height
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Vertical transportation systems
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Reinforcement for weight bearing
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Choosing a Building Height
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Which point of the isoquant minimizes the building cost.
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Lets continue our example (table 6-5) adding land rent.
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Will see how as land price ↑ firms will substitute Land for K.
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Choosing a Building Height
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Low Rent ($40): Short building is least costly
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Medium Rent ($200): Medium building is least costly
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High Rent ($1600): Tall building is least costly
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Office Bid Rent with Factor Substitution
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WTP = Total Revenue - non-land costs
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One part of non-land cost is travel costs of office workers
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Bid rent per hectare = WTP / size of production site
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©2009 The McGraw-Hill Companies, All Rights Reserved • Without factor substitution we get a concave Bid-Rent curve.
• With factor substitution we get a convex Bid-Rent curve 6-17
Moving Closer to the Center
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Move from 5 blocks from center to 1 block from center
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Point e . Four story building (efficient). Bid-Rent = $200.
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Savings in travel cost: point e to point a; ∆ Bid = $656
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Savings from factor substitution: point a to j; ∆Bid = $744
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Result: ∆ Bid rent exceeds the decrease in travel cost
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Moving Farther from the Center
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Move from 5 blocks away from center to site farther away
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Increase in travel cost decreases bid rent
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Factor substitution saves cost and increases bid rent
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Result: ∆ Bid rent is less than the increase in travel cost
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