Land Rent vs. Market Value

LAND USE ECONOMICS : Land Rents, Accessibility and Urban Form1.EKONOMI LAHANSumber: http://en.wikipedia.org/wiki/Land_%28economics%29 .. 2/3/2013. In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum.

Natural resources are fundamental to the production of all goods, including capital goods. Location values must not be confused with values imparted by fixed capital improvements. In classical economics, land is considered one of the three factors of production (along with capital, and labor). In some cases, land may be merged with capital due to the relatively small importance that land has in industrial and service sectors. Income derived from ownership or control of natural resources is referred to as rent.

Land was sometimes defined in classical and neoclassical economics as the "original and indestructible powers of the soil.Georgists hold that this implies a perfectly inelastic supply curve (i.e., zero elasticity), suggesting that a land value tax that recovers the rent of land for public purposes would not affect the opportunity cost of using land, but would instead only decrease the value of owning it. This view is supported by evidence that although land can come on and off the market, market inventories of land show if anything an inverse relationship to price (i.e., negative elasticity).As a tangible asset land is represented in accounting as a fixed asset or a capital asset.2LAHAN: FAKTOR PRODUKSISumber: http://en.wikipedia.org/wiki/Factors_of_production.. 2/3/2013In economics, factors of production are the inputs to the production process. Finished goods are the output.Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function. All factors of production like land, labor, capital and technology are required in combination at a time to produce a commodity. In economics, production means creation or an addition of utility. Factors of production (or productive 'inputs' or 'resources') are any commodities or services used to produce goods or services'Factors of production' may also refer specifically to the 'primary factors', which are stocks including land, labor (the ability to work), and capital goods applied to production. Materials and energy are considered secondary factors in classical economics because they are obtained from land, labor and capital. The primary factors facilitate production but neither become part of the product (as with raw materials) nor become significantly transformed by the production process (as with fuel used to power machinery).

'Land' includes not only the site of production but natural resources above or below the soil. The factor land may, however, for simplification purposes be merged with capital in some cases (due to land being of little importance in the service sector and manufacturing).

3RENTE EKONOMI = SEWA EKONOMISumber: http://en.wikipedia.org/wiki/Economic_rent#Land_rent.. 2/3/2013In economics, Economic rent typically describes the difference between the amount paid for the inputs to a production process and the amount that would be paid for those inputs assuming a unitary (or greater) elasticity of supply.Economic rent (which in production analysis is always seen as a cost of inputs) is affected by any production only minimally, if at all.

Economic rent is a fact of natural or contrived exclusivity. For labor, economic rent could be created by the existence of guilds or labor unions (e.g. higher pay for workers, where political action creates a scarcity of such workers); for a produced commodity, economic rent may also be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient); for operating licenses, it is the cost of permits and licenses that are politically controlled as to their number of licenses regardless of competence and willingness of those who wish to compete in the area being licensed; for most other production including agriculture, economic rent is due to natural scarcity.

When economic rent is privatized, the recipient of economic rent is referred to as a rentier.

4Rente LAHANSumber: http://en.wikipedia.org/wiki/Economic_rent#Land_rent.. 2/3/2013In political economy including physiocracy, classical economics, and other schools of economic thought excepting neoclassical economics, land is recognized as an inelastic factor of production. Rent is the distribution paid to freeholders for "allowing" production on the land they control.

"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ...."

Adam Smith: The Wealth of Nations

5Rente LAHANSumber: http://en.wikipedia.org/wiki/Economic_rent#Land_rent.. 2/3/2013David Ricardo is credited with the first clear and comprehensive analysis of differential land rent and the associated economic relationships (Law of Rent).

Johann Heinrich von Thnen was especially influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was density of population increasing the profitability of commerce and providing for the division and specialization of labor that commanded higher municipal rents. And the high rents determined that land in a central city would not be allocated to farming, but would be allocated instead to more profitable residential or commercial uses.

Observing that a tax on the unearned rent of land would not distort economic activities, Henry George proposed that publicly collected land rents (land value taxation) should be the primary (or only) source of public revenue; though he also advocated public ownership, taxation and regulation of natural monopolies and monopolies of scale that cannot be eliminated by regulation.

6RENTE LAHANTerminology relating to rent

Gross rent Gross rent refers to the rent paid for the services of land and the capital invested on it. It consists of economic rent, interest on capital invested for improvement of land and reward for risk taken by the landlord in investing his capital.

Scarcity rent Scarcity rent refers to the price paid for the use of the homogeneous land when its supply is limited in relation to demand. If all units of land are homogeneous, but demand exceeds supply, the entire land will earn economic rent by virtue of its scarcity.

Differential rent Differential rent refers to that rent, which arises owing to differences in fertility of land. The surplus that arises due to difference between the marginal and intra-marginal land is the differential rent. It is accrued generally under extensive cultivation of land. The term was first stated by David Ricardo.

Contract rent Contract rent refers to that rent which is mutually agreed upon between the land-owner and the user. It may be equal to the economic rent of the factor. Sumber: http://en.wikipedia.org/wiki/Economic_rent#Land_rent.. 2/3/20137LAND RENT THEORY & RENT CURVESumber: http://people.hofstra.edu/geotrans/eng/ch6en/conc6en/landrenttheory.html.. 2/3/2013Three concepts are at the core of the land rent theory:

Rent. A surplus (profit) resulting from some advantage such as capitalization and accessibility. The rent is the highest for retail because this activity is closely related to accessibility.Rent gradient. A representation of the decline in rent with distance from a center. This gradient is related to the marginal cost of distance for each activity, which is how distance influences its bidding rent. The friction of distance has an important impact on the rent gradient because with no friction all locations would be perfect locations. Retailing is the activity having the highest marginal cost, while single family housing have the lowest marginal cost.Bid rent curve function. A set of combinations of land prices and distances among which the individual (or firm) is indifferent. It describes prices that the household (firm) would be willing to pay at varying locations in order to achieve a given level of satisfaction (utility/ profits). The activity having the highest bid rent at one point is theoretically the activity that will occupy this location.

8EKONOMI LAHANSumber: http://www.extension.iastate.edu/agdm/wholefarm/html/c2-20.html.. 2/3/2013Approaches for Determining a Rental Rate

Determining a fair rate is not easy. Cash rents are likely to be too low during periods of rising prices and high yields and too high during periods of declining prices and low yields.

Rates often reflect the results of the past few years more than the upcoming year.Estimating a cash rental rate for cropland can be based on:what others are charging/payingaverage yieldscorn suitability ratings (CSR index)share of gross crop valuereturn on investment crop share equivalenttenants residual.

Renting, also known as hiring, is an agreement where a payment is made for the temporary use of a good, service or property owned by another.

9Mengapa ada KOTA ?Mengapa sebaran penduduk tidak merata secara spatial ke seluruh lanskap?

Comparative advantage = Keunggulan komparatifSekala ekonomi internalAglomerasi ekonomiSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsKeunggulan komparatif = Comparative advantage (CA)Based not on absolute advantage but on opportunity cost (OC)Wheat and wool example: west can make 6 cloth or 2 wheat in one hour; east can only make 1 of each in one hour. West has CA in cloth, east in wheat, because for west OC of cloth is 1/3 wheat unit, while OC of east for wheat is 1 cloth, which is better than 3 for westCA leads to trade in this case based on OCTrade is beneficial only if offsets transpo costs

Output per labor hourOC of ProductionEastWestEastWestWheat121 C3 CCloth161 W1/3 WSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsKeunggulan Komparatif dan Sekala Ekonomi dalam TransportasiScale econ in transpo means trans cost is not independent of volume shipped; cost per unit mile dec. with volumeOtherwise producers/consumers would engage only in direct tradeCities develop if scale economies in transpoThen makes sense for trading firms to operate as intermediaries, locating at central places for collection and distribution of goodsLeads to development of market citiesOccurs when: ag productivity is high enough to generate surplus, CA is large enough to offset transpo costs and scale economies in transpo Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsSekala Ekonomi Internal dalam ProduksiAs volume increases, productivity per laborer increasesArise because of:Factor specialization: worker skill increases with repetition and spend less time switching between tasksIndivisible inputs: when certain prod input has minimum indivisible scale; i.e. certain input facilities/equipment cant be scaled down

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsArea pasar karena sekala ekonomiDefined as area where factory can underprice home productionWorkers live near factory and bid up land price, causing higher densitytravel costFactory costMiles from factory (radius)Net costCost of homemade productMarket areaMarket areaSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsAglomerasi Ekonomi dalam produksi (AEP)Why do most cities have more than one factory/production facility?AEP: positive externalities allow firms to produce at lower cost per unit because of Localization economiesUrbanization economiesSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsAEP: Lokalisasi ekonomiWhen production costs of firm in a certain industry decrease as total industry output increases. Due to:Scale economies in intermediate inputsLabor market poolingKnowledge spillovers

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.caruban.htjati.des2012Lokalisasi ekonomi: Sekala ekonomi untuk input intermedierFirms often cluster because they share inputs from the same supplier if:

Input D of firm is not large enough to leverage the scale economies in input production alone

Transportation costs are relatively high; this is not only because it is costly to transport input but also design/specification of input requires frequent fact to face contact: Manhattan dressmaking and button makersrequires face to face because designs must be adaptable and producers must supervise input specifications Corporate headquarters and advertising/marketing firm: need lots of interaction; needs constantly changingHigh-tech firm: needs to locate near its suppliers of non-standard parts; interaction in testing and design of parts

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsLokalisasi ekonomi : Sekala ekonomi untuk input intermedierBusiness firms often need many services (finance, banking, design, insurance, legal, etc.) so big business clusters develop to exploit scale economies provided by themPublic services also important: areas with good transportation infratructure, services, schools, will attract these clusters of firmsSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsLokalisasi ekonomi: Labor market poolingClustering increases labor efficiencyFacilitates transfer of workers between firms in dynamic industriesMany industries have high mobility between firms, e.g. entertainmentLeads to more stable wage pool, which means wages can be lower in generalLabor pooling is net benefit to firms if wage at isolated site is variable (for good and bad economic times) and wage at cluster is average of those two wages; cluster firm can staff up or downsize more easily than isolated firmSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsLokalisasi ekonomi: knowledge spilloversRapid exchange of information /technology in clusterBased partly on the shared pool of workersLeads to many innovation corridorsSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.Malang.Veteran.Febr2013Teori Siklus ProdukIncubator process: Often firms cluster when they are in earlier stage of development because production techniques unsettledAs production becomes standardized, often move to lower density areas where land and labor costs are lowerSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsAEP: Ekonomi UrbanisasiProduction cost of a firm declines as total output of urban area increasesOccurs for same reasons as localization economiesDifferent from localization economies in:Result from scale of entire urban economyGenerate benefits for all firms in city, not just in single industryRather than being in one industry, benefits cut across industriesMore empirical evidence for localization economies than for urbanization, although Mills points to different results

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsTeknologi dan KotaTelecom technology may reduce some advantages from agglomeration economiesHowever, evidence suggests it is more complement than substituteactually generates more demand for face to face contact and travel, partly because allows for greater specialization in design/productionBusiness travel actually increase 50% from 1985 to 1995Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.nganjuk.Febr2013Retail: Ekonomi Aglomeratif dalam pemasaranShopping externalities occurs when sales of one store are affected by location of others in same product lineThe clustering of similar shops causes sales for all to be higherTwo types of products lead to this:Imperfect substitutesComplementary goods

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsSubstitusi tidak sempurnaSame product type, but subtle differences between product lines;

clustering reduces shopping costs by facilitating comparison shopping, attracting more consumers Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Substitusi tegakan jati dengan non-jatiBARANG KOMPLEMENTERItems that complement each other and can be purchased on same tripE.g. new TV and new TV cabinetSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.malang.pasarminggu.Febr2013Sewa Lahan vs. Nilai PasarMarket value: the present value of the stream of rental income generated by land

Rental Income: the amount the landowner charges to use land; equal to income from land minus costsSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.madiun.Febr201327Apakah Nilai Kini (Present Value)?It is the maximum amount an investor would be willing to pay for something, given that the investor could safely make i percent returns on an alternative investment (for instance, a savings account, or T-bills). It equals, the stream of income, discounted over time

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics28Bagaimana PV di-diskonto ?PV takes into account the fact that a dollar earned 5 years from now if worth less to us now than a dollar earned todayThis is because income put off until later has opportunity cost associated with it.A dollar invested in five years is worth less than a dollar invested today PV takes into account lost opportunity from that alternative investmentSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics29Bagaimana menghitung PV?For $20 yearly stream for 5 years at 10% PV= $20 +$18.18 + $16.53 + $15.04 + $13.70 = $83.45For a constant stream of income into infinity, rule simplifies to PV= R/i = $20/.1= $200Non-constant income example:PV= $20 + $24/1.1 + $29/1.21 + $34/1.33etc.

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics30Nilai-Pasar bagi LahanEquals PV of annual maximum rental payments that the landowner can chargeFor market value to equal PV: given yearly income R and alternative ROR of i , investor is indifferent between buying the land and investing that money elsewhereFrom here out we talk of land rent in place of price, and assume users of land pay rentSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics31Seewa Lahan & ProduktivitasValue of land, and hence land rent derives from productivityEarliest model of productivity comes from Ricardo (1821) who looked at land fertilityAssumptions: fixed inputs/output prices (price takers), zero profit, 3 levels of fertility, land to highest bidder, location (transpo costs) can be ignored, owners are not farmersSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics32MODEL RICARDOOn fertile land, a farmer can produce same amount of corn with fewer inputsThe price of this type of land is bid upAll profit accrues to the landowner in the form of rentsPayment to farmer is considered a cost

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics33ATCMCProfit=rent>>to landownerATCMCProfit=rent>>to landowner160220ATCMC$10Q=amt of corn$A landB landC landA land has lowest production costs= highest rentsC lands rent is 0 because costs are greater than revenue Price determined exogenously by supply and demand in market$8$4Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsMODEL RICARDO34Competition among farmers for good land bids up rents on that land until economic profits* =0 for farmer. All profits on land go to owner. Economic profits: greater than normal profits required to pay for time of those doing the workRent for A land= TR-TC= $2200-$880=$1320

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban EconomicsMODEL RICARDO

Foto :smno.malang.klandungan.juli201235Prinsip LeftoverIn equilibrium, Rent= profits, or revenue over total nonland costsRent eats up whatever is left over because competition for land bids away any excessThat is, competition among farmers for land bids away excess profits until they are zero and landowner gets all surplus valueSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics36Perkecualian dari Prinsip leftoverIf there is restrictions on entry or on competitionE.g. if farmer (non-owners) owns patent to farming techniques that reduce costs, landlord cannot charge additional rents reflecting those additional profits because noone else would be willing to pay such high rents

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics37Siapa mendapat manfaat dari pembangunan?Contoh : Proyek Irigasi Pertanian

If price of corn is fixed (exogenous) the landlord benefits because competition among farmers for land will bid away profitPemenang: Pemilik lahan; loser: Petani

However, if the project affects the price of corn (price is endogenous), consumers gain with lower prices, while farmer pre rent profits are reduced, lowering land rents

Pemenang: Konsumen; loser: Pemilik Lahan

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics38Sekala PembangunanWho benefits is determined by scale of improvementSmaller the area, the more the benefit goes to landowner; larger the area, more goes to consumers because of price endogeneityBenefits from any improvement are capitalized into the value of land; a positive capitalization increases rents, which increases market valueNegative factors can be capitalized tooSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics39AKSESIBILITAS = AccessibilityNow replace fertility of land with location as the prime determinant of land value--Von Thunen model (1826) No longer assume that transportation is costlessThis model explains why more central locations command higher rents and have higher market values than fringe areas Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.rumahkampus.Febr201340TEORI BID-RENT (Tawaran Sewa)Sumber: http://wiki.answers.com/Q/What_is_the_bid_rent_theory . 2/3/2013Bid Rent Theory says that the closer a property is to the center of the district, the more desireable it is. The further out a piece of land is, the smaller its value. The amount that the competing land users are willing to pay for these properties is called the bid rent.

In agriculture, bid rent is the monetary return a farmer can receive for growing a particular crop on a unit of land after all costs of production (including transportation to the market) are taken into account. Crops with the highest production costs will be nearest to the market place. Those with low production costs will be farther away. 41TEORI BID-RENTSumber: . 2/3/2013The bid rent theory is a geographical economic theory that refers to how the price and demand for real estate changes as the distance from the Central Business District (CBD) increases. It states that different land users will compete with one another for land close to the city center.

This is based upon the idea that retail establishments wish to maximize their profitability, so they are much more willing to pay more money for land close to the CBD and less for land further away from this area.

This theory is based upon the reasoning that the more accessible an area (i.e., the greater the concentration of customers), the more profitable.42TEORI BID-RENTSumber: http://en.wikipedia.org/wiki/Bid_rent_theory . 2/3/2013Bid rent curve

CBD= PUSAT KOTA43TEORI BID-RENTSumber: . 2/3/2013Agricultural analogyThough later used in the context of urban analysis, though not yet using this term, the bid rent theory was first developed in an agricultural context. One of the first theoreticians of bid rent effects was probably David Ricardo, according to whom the rent on the most productive land is based on its advantage over the least productive, the competition among farmers ensuring that the full advantages go to the landlords in the form of rent. Later, this theory was developed by J. H. von Thnen who combined it with the notion of transport costs. His model implies that rent at any location is equal to the value of its product minus production costs and transport costs. Admitting that transportation costs are constant for all activities, this will lead to a situation where activities with the highest production costs are located near to the market place. Those with low production costs will be farther away.The concentric land-use structure thus generated closely resembles the urban model described above: CBD - high residential - low residential. This model, introduced by William Alonso, was inspired by von Thnen's model.44Bid rent theory in the Central Business District (CBD)Sumber: http://en.wikipedia.org/wiki/Bid_rent_theory. 2/3/2013Land users, whether they be retail; office; or residential, all compete for the most accessible land within the CBD. The amount they are willing to pay is called bid rent. This can generally be shown in a bid rent curve. Based upon the reasoning that the more accessible the land, generally in the centre, is the more expensive land.

Commerce (in particular large department stores/chain stores) is willing to pay the greatest rent to be located in the inner core. The inner core is very valuable for them because it is traditionally the most accessible location for a large population. This large population is essential for department stores, which require a considerable turnover. As a result, they are willing and able to pay a very high land rent value. They maximise the potential of their site by building many stories.

As one goes farther from the inner core, the amount commerce is willing to pay declines rapidly.45Sumber: http://en.wikipedia.org/wiki/Bid_rent_theory . 2/3/2013Industry, however, is willing to pay to be in the outer core. There is more land available for their factories, but they still have many of the benefits of the inner core, such as a market place and good communications.

As one goes farther out, the land becomes less attractive to industry because of the reducing communication links and a decreasing market place. Because householders do not rely heavily on these and can now afford the reduced costs (when compared with the inner and outer core),they can purchase land. The further from the inner core and, the cheaper the land. This is why inner city areas are very densely populated (terraces, flats and high rises), whilst the suburbs and rural areas are sparsely populated (semi and detached houses with gardens).Bid rent theory in the Central Business District (CBD)46ECONOMICS OF LANDUSESumber: http://www.rri.wvu.edu/WebBook/Giarratani/chaptersix.htm . 2/3/2013Every human activity requires some elbowroom.

The qualities of land include, in addition, such attributes as the topographic, structural, agricultural, and mineral properties of the site; the climate; the availability of clean air and water; and finally, a host of immediate environmental characteristics such as quiet, privacy, aesthetic appearance, and so on.

All these thingsplus the availability of such local inputs as labor supply and community services, the availability of transferable inputs, and the accessibility of marketsenter into the judgment of what a particular site is worth for any specific use.47ECONOMICS OF LANDUSESumber: . 2/3/2013COMPETITION FOR THE USE OF LAND

Most land can be utilized by any of several activities. Even an uninhabitable and impassable swamp may have to be allocated between the competing claims of those who want to drain or fill it and those who want to preserve it as a wetland wildlife sanctuary. The normal multiplicity of possible uses means that in considering spatial patterns of land use, we can no longer think in terms of the individual location unit or of one specific activity but must move up to another level of analysis: that of the multiactivity area or region.

Competition for land plays an important locational role in areas where activities tend to concentrate for any reason. Locations having good soil, climate, and access to other areas, and areas suitable for agglomeration under the influence of local external economies are in demand. The price of land, which is our best measure of the intensity of demand and competition for land, varies with quality and access, and rises abruptly to high peaks in the urban areas. Anything we can discover about the locational role of land-use competition, then, has particular relevance to the urban and intraurban problems that have become so important in recent years.

48ECONOMICS OF LANDUSESumber: . 2/3/2013COMPETITION FOR THE USE OF LAND

In order to understand the way in which land is allocated to various activities, we shall first ask what determines how strong a bid any particular activity can make for the use of landthat is, the maximum rent per acre that that activity could pay for land in various locations.

In a society that uses prices, costs, and profits as a principal mechanism for allocating resources, this line of inquiry will help explain actual location patterns.

It will also provide a rough guide as to which location patterns represent an efficient allocation of resources from the standpoint of the economy as a whole.

49ECONOMICS OF LANDUSESumber: . 2/3/2013RENT AND LAND VALUE

Our discussion of rents and competition for land has placed almost exclusive emphasis on the location of a site (relative to markets and sources of inputs) as an index of its value.

Location has determined how much rent any particular activity can afford to pay for the use of a site; the purchase price has been explained as simply the capitalized value of the expected stream of future rents.

At this point we need to recognize some significant complications that have until now been ignored.

50ECONOMICS OF LANDUSESumber: . 2/3/2013Speculative Value of Land

The expected future returns on a parcel of land may sometimes be quite different from current returns, particularly in locations where radical changes of use are taking place or expected. This is generally true around the fringes of urban areas, where the change involves conversion from farm to urban uses. The price that anyone will pay for the current use of the land may be quite low in relation to the speculative value based on a capitalization of expected returns in a new use.

This point is illustrated in the results of a study of agricultural land near the city of Louisville, Kentucky, well over half a century ago. It will be observed that in the zones farther than 8 or 9 miles from the city, the current annual rent was consistently about 5 percent of the average value of the land. In other words, the value was approximately 20 years rent at the current rate. Closer to the city, the land was worth, on the average, well over 26 times the current annual rent; the capitalization rate was only 3.8 percent. This obviously reflected the expectation that returns on the nearby land would rise as the urbanized area spread.

51ECONOMICS OF LANDUSESumber: . 2/3/2013Improvements on Land

A further complication is that land is ordinarily priced, sold, and taxed in combination with whatever buildings and other "improvements" have been erected on it, since such structures are usually durable and difficult (if not impossible) to move.

On urban land, improvements may account for a major part of the value of the parcel of real estate; and in all cases it is probably difficult to estimate just how much of the price represents the value of space per se, or "site value."

Sometimes the "improvements" have a negative value: In other words, the land would be more desirable if it were cleared of its obsolete structures.

52ECONOMICS OF LANDUSESumber: . 2/3/2013RESIDENTIAL LOCATION

The analysis of land use developed in this chapter views economic activities as differing in the value that they place on access to some central location. As indicated earlier, households are a major land-using activity, and they too are characterized by significant access linkages. Because of this, some of the principles developed thus far concerning land-use decisions are applicable to residential location decisions.

One of the first and most widely recognized efforts to explain residential location behavior is that of William Alonso.15 Alonso applies the concept of bid rent in order to isolate factors that contribute to the households willingness to pay for access to the central business district (CBD) of an urban area. Bid rents have been defined as the maximum rent that could be paid for an acre of land at a given distance from the market center, if the activity in question is to make normal profits. Here, however, we want to analyze residential location behavior, so the concept of profits is no longer relevant to the decision-making process.

Instead, Alonso recognizes that households make choices among alternative locations based on the utility or satisfaction that they expect to realize. Consequently, the bid rent of a household is defined as the maximum rent that can be paid for a unit of land (e.g., per acre or per square foot) some distance from the city center, if the household is to maintain a given level of utility.

53ECONOMICS OF LANDUSESumber: . 2/3/2013The figure presents several bid rent curves labeled u1, u2, and u3 for one household. Each of these curves plots the relationship between rent bids and distance from the CBD associated with a different level of utility.

These curves have several important characteristics. First, they are negatively inclined. As developed earlier in this chapter, the rent gradient of a particular activity plots out decreasing rent bids as distance from the market increases because of transfer costs. Household rent bids are similarly affected by transfer considerations. An individual facing a daily commute to the CBD for work or shopping, or both, must pay lower rents in order to offset the associated transfer costs of a longer trip, if utility is to be held constant. Second, lower bid rent curves are associated with greater utility. Assuming that the households budget is fixed, at any given distance from the CBD, if a lower rent bid is accepted, more other goods can be consumed. Therefore, utility will increase.

Finally, bid rent curves are single valued. This means that for a given distance from the CBD only one rent bid is associated with each level of utility. By implication, we may state that bid rent curves cannot intersect; otherwise they could not be single valued. 54ECONOMICS OF LANDUSESumber: http://www.landandhousing.com/GROWTH.html. 2/3/2013Production of land may be use for "farming", residential, industrial or commercial occupancy. Best and highest "use" refers to the production which gets the highest bids from all non-coerced bidders, while the seller is not coerced to sell.

55ECONOMICS OF LANDUSESumber: http://www.rri.wvu.edu/WebBook/Giarratani/chaptersix.htm. 2/3/2013A Basic Sequence of Rural Land Uses

In von Thnens schematic model, he assumed that the land was a uniform flat plain (not too unrealistic for the part of the world where he farmed), equally traversable in all directions.

Consequently, the various land uses could be expected to occupy a series of concentric ring-shaped zones surrounding the market town, and the essential question was the most economical ordering of the zones.

56ECONOMICS OF LANDUSESumber: http://www.answers.com/topic/bid-rent-theory. 2/3/2013A bid-rent curve is a graph of the variations in land rents payable by different users with distance from some point in the market, usually the CBD.

Since transport costs rise with distance from the market, rents generally tend to fall correspondingly, but different forms of land use (retail, service, industrial, housing, or agricultural) generate different bid-rent curves.

57ECONOMICS OF LANDUSESumber: http://www.s-cool.co.uk/a-level/geography/urban-profiles/revise-it/central-place-and-bid-rent-theories. 2/3/2013Bid-rent theory

In order to have a good understanding of the way urban areas are likely to grow, it is important to have an understanding of Bid-rent theory.

The diagram shows what various land-users are prepared and able to pay for good access to the CBD:

58ECONOMICS OF LANDUSESumber: http://www.s-cool.co.uk/a-level/geography/urban-profiles/revise-it/central-place-and-bid-rent-theories . 2/3/2013Bid-rent theory

It can be seen that commerce (in particular large department stores/chain stores) is willing to pay the greatest rent to be located in the CBD. The CBD is very valuable for them because it is traditionally the most accessible location for a large population. This large population is essential for department stores, which require a considerable turnover. As a result, they are willing and able to pay a very high land rent value. They maximise the potential of their site by building many stories.As you move from the CBD, commerce is unwilling to pay as much for a site. In fact, what they are willing to pay declines rapidly.Industry is, however, willing to pay to be on the outskirts of the CBD. There is more land available for their factories, but they still have many of the benefits of the CBD, such as a market place and good communications.As you move further out, so the land is less attractive to industry and the householder is able to purchase land. The further you go from the CBD, the cheaper the land. This is why inner city areas are very densely populated (terraces, flats and high rises), whilst the suburbs and rural areas are sparsely populated (semi and detached houses with gardens).59ECONOMICS OF LANDUSESumber: http://www2.hawaii.edu/~matt/366/cities1.html. 2/3/2013Land Use Pattern Models : Concentric Ring Model - Bid Rent model

60PETANI WORTELAssume: land is equally fertile, profits are zero, there is one central market, p is fixed and farmers use fixed factor productionCost is now fn of distance Transport Cost= cost/ton/mile*dist*QProfit= P*Q-PC-TC-Rent = 0 Rent= P*Q-PC-TCSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics61Carrot Farmers bid rent functionBid rent/acre

$50$300CloseDistance to marketFarTotal CostLand rentsTotal revenue per acre (P*Q; Q/acre does not vary)$190$110$250Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics62KEPUTUSAN PETANI PEPAYANow, market-proximate land replaces fertile land as the most valuable typeHowever, competition for close land bids away surplus profit so, assuming farmers are identical, they are indifferent among all locations, as long as total revenue exceeds total costSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.kediri.plemahan.febr201363Petani dan Faktor SubstitusiWhat if farmers can be different? Then the bid-rent function becomes convex.Under linear function, fixed amount of land and non-land inputs, no matter where Under convex function, farmers engage in factor substitution: they increase non-land inputs (equipment, labor, technology) as land gets more central and expensiveSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics64Bid Rent fn for both farmersBid rent for flexible farmerBid rent for fixed-factor farmerRent/ acreDistance to marketU*Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics65Bid rent of flexible farmerFlexible farmer will outbid the inflexible farmer in all locations but uThat is, land will be used more intensively and, hence, more efficiently at central locations, and non-land inputs will be fewer far awayWith inflexible farmers, land is used more inefficientlyRents will still equal profits of highest bidderSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics66Two competing land usesDifferent land uses (e.g. SPAM factory and grain farm) may have different bid rent functions. The shapes of those functions will determine who will locate whereSteepness of fn determined per unit transport costs relative to per unit priceAs usual, land goes to highest bidderMarket allocates land efficiently to usage with the most to gain from being close to the marketSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics67Determinants of bid rent slopePer acre transportation costs. The more weight you produce/acre, the more transport will cost per acre cultivated. E.g. potatoes vs. cottonUnit transport costs. The more a given unit weight costs to ship, the higher the transport costs. E.g. eggs vs. turnipsSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.kediri.plemahan.febr201368Bid Rent fn for both farmersRent/ acreUHeavy goodLight goodU= where heavy use transitions to light useSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics69Bid Rent of Firms in the CBDProfit is:= PQ-NC-TC(d)-R(d)Profit= price*quantity nonland costs- transport costs (function of distance) rents (function of distance); TC(d)= cost/ton/mile* distance*quantityThen R(d)= PQ-NC-TC(d)

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics70Freight Costs and RentsFreight costs decrease with proximity to city centerThrough leftover principle, rents increase as transport costs decreaseHence, there will be a downward sloping bid rent function; it will be linear for fixed factor producers and convex for flexible producersSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.malang.sutta.Febr201371Flexible versus fixed producersFixed: R(d)= P*Q-NC-TC(d)Flexible: = P*Q-NC-TC(d)-R(d)*L(d),Where L(d) is amount of land used at distance d; this results in rent function:R(d)= (P*Q-NC-TC(d))/L(d)Flexible farmer substitutes nonland for land input: spends more on equipment and labor as land gets more expensiveSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics72Flexible versus fixed producersFlexible produce = factor substitution = lower costs* = higher profitsBy leftover principle, higher profits= higher bid rentsClose to city center, land costs are lower; at periphery, freight costs are lowerSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics73Monocentric city firms bid rent functionDistance from export hubBid RentFixed-factor producerflexible producerABThe flexible firm outbids the fixed factor firm everywhere but point u. At u, the fixed factor producer uses too much landuuSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics74Nonland versus land inputs for the Flexible producerLand AmountNon-land inputsflexible producerABSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics75Most central firm type: officesOffice firms: require 1) lots of meetings and face to face contact, 2)ability to gather, process and distribute information quickly and 3)access to services, like printing, lawyers, designers, accountants, etc. This type of firm will have a steep bid rent function because the travel cost of individuals is very high; travel cost is high because their pay rate is high, since it is generally skilled work Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.malang.kota.febr201276Land use in CBDAll firms are attracted to center, but only some will be willing to bid enoughOffice firms have steepest bid rent fn, and will occupy the most central land Market allocation is efficient, because the office industry has the most to gain from being in the center; manufacturing could gain too, but not as much, so its willing to locate a little further out.Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics77Office vs. manufacturingSuppose office firm 1 block from center and manufacturer 5 blocks. If they swapped locations, this would dramatically increase the office firms travel costOffice firm TC= 3min/block*$4/min*200 meetings/month= $2400 per block/month

So the swap increase TC for office by $9,600/mo, but only saves the manufacturer $800/month in transportation costs (50 tons * $4/ton/block= $200/block). Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics78Multiple land use rent gradientOffice zoneManufacturingzoneResidentialzoneDistance to centerBid RentOffice Bid rentManuf. Bid rentResidential bid rentUUSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics79Locational choicesOffice ZoneResidential ZoneManufacturing ZoneUUSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics80Pilihan LokasiOffice ZoneResidential ZoneManufacturing ZoneUUSo workers live on the periphery because they are cheap to transport (i.e. commuting costs are low) relative to cost of moving freight (for manufacturers).

For offices, same problem, because of high price of moving executives around for meetings. If office is in suburbs, executive is constantly going to CBD

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics81Siapa menghuni apa?Activities are arranged according to transport costs; those with the highest costs occupy the most central landActivity with the highest transport cost will have the highest bid rent curveAll firms have tug-of-war between locating centrally to keep transport cheap, and locating in the suburbs to keep workers commute cost lower (and hence pay lower wages)CBD wins because cost of freight hauling greater than cost of moving workersSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics82Fungsi harga perumahanIn the monocentric model, residents will be attracted towards the center but be outbid by offices and manufacturing. Assume no factor substitution, identical 1000 sq ft houses, fixed budget of $300/mo for housing+commuting, commute cost (CC)= $20/mi. WTP for housing = $300- CC. Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics

Foto :smno.malang.klandungan.juli201283Fungsi harga perumahanP housing/ sq ft$.3$.18$.066 mi12 miD for housing near center pushes up price until rent= budget-CC. Residents now indifferent among all locations in citySumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics84Fungsi harga perumahan dengan substitusi konsumenWith consumer substitution, residents consume less land as price of land goes up; instead consume more local amenitiesHence, more central homes are smallerFlexible residents will outbid fixed factor residents everywhere but tangency point

Change in P due to distance = , or negative of (tranpo cost/mi divided by amount of housing consumed)

Sumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics85Fungsi harga rumah hunian dengan subsitusi konsumenP housing/ sq ft$.3$.18$.066 mi12 miPrice w consumer subSumber: Lecture by Austin Troy University of Vermont, based on Arthur OSullivan, Urban Economics86

Sumber: foto:smno.rumahkampus.dau.febr2013Economics rent of land : location accessibility87