Composition of urban land use: 30% residential, 10% manufacturing, 5% commercial, 35% public and remainder vacant. In a market economy economic forces determine the use of parcels of land that determine the land-use patterns of the city. (Note: zoning generally follows the market.)

The form of cities with areas of tall, closely spaced buildings and high employment densities translate into the economic observation that the ratios of capital and labor to land inputs are high in those areas.

Mononuclear cities have a single downtown district with intensive land use at a central location. Multinuclear cities may also have other centers of intensive land use (the Galleria in Houston)

Rent is the return to land. Technically, land is a natural factor of production, the supply of which is unaffected by price. In other words, its supply is perfectly inelastic and its value is demand determined. Note that property is not land. Property is both land and structures on the land. Hence, property rent is the return on land and capital improvements.

1. Price theory predicts that input proportions are influenced by relative input prices, so that substitution of capital for land occurs when the price of land (rent) is relatively high. Land, therefore, is incorporated into the theory of production.

2. The theory of production, modified by the inclusion of land, can be used to analyze the particular spatial relationships that characterize urban areas. (The subject of chapter 6)
3. The special character of land rent is that it is the price of nonproduced inputs and is considered to be a residual. Land rent can be viewed as the price of the services yielded by land during a specific time period in which the land is measured.
4. The present value of these land rents reflects the discounted value of future services yielded by land. If land does not deteriorate (although the assets associate with land may deteriorate), then its present value is as follows:

V = R/i where R is rent that is discounted over an unlimited future time period at the rate, i.

5. Improved land value is the value of land with a structure on it while unimproved land value is the value of vacant land. Improvements can be other than structures (drainage, etc.). Also, data on the value of unimproved land is more difficult to obtain, since there are likely to be fewer transactions involving vacant land in urban areas. Nevertheless, the value of land refers to its value without improvements. Hence, it is often treated as the residual after the value of other assets that exist on the land are removed.

1. Assume that input and product markets are perfectly competitive. Without this assumption the analysis is complicated, especially if externalities are introduced into the market analysis.
2. Also assume that people own productive land and capital assets because of the return they yield. Owners, therefore, seek the use of the asset that yields the greatest return available ("highest and best use").
3. Under these assumptions differences in urban land value will depend upon differences in productivity of land for urban use, which can vary considerably within an urban area.
4. When land is combined with capital and labor in a production function in perfectly competitive markets, each input will be used in such a manner as to equate the value of marginal product with it price. Otherwise, substitution would take place among inputs until this condition is met. The input price is determined by the equality of demand and supply for the input in the industry as a whole.
5. Therefore, we can conclude that rent will equal the value of its marginal product, i.e. P x MP = R. The only peculiarity regarding land is that as a nonproduced input, its supply is fixed, i.e. perfectly vertical (inelastic). Hence, the price of land is determined by the total demand curve for the industry.

In summary, Rent is the return to land. Technically, land is a natural factor of production, the supply of which is unaffected by price. In other words, its value is demand determined. Note: property is not land. Property is both land and structures on the land. Hence, property rent is the return on land and capital improvements.

1. In the nineteenth century economist David Ricardo (1821) and social philosopher Henry George (1879) thought that land rents would absorb all of the fruits of progress, and, since they were not due to the fruits of owner's labor, should be taxed away for the good of society.
2. Ricardo's view rested on derived demand based upon Malthus' population growth theory and an under estimation of the importance of technical change. High birthrates would increase population and depress wage rates to a subsistence level in the long run (also adopted view of Karl Marx). Land rent would be the residual that would absorb all revenues left over after paying workers, and it would become an increasing share of aggregate income.
3. Suppose costs and rents on two alternative sites with average cost and marginal costs of production, excluding rents. As the product price increases, (a) rent on land already in use increases, (b) output of land already in use increases, and (c) new land is brought into production.
4. Rent is the difference between price and average cost, excluding rent. Note that threshold price (demand) must exist in order for improvements to take place.
5. Henry George advocated a single tax on land that has the benefit of not reducing the supply of land available. It has theoretical merit, but is impractical to administer and unfair if current landowners paid for their land, so that the tax would be confiscatory (remove wealth or asset value - unconstitutional in the U.S.)
6. If property taxes in general are increased it would have an adverse effect on the incentive to improve land and use it efficiently, similar to higher income taxes on the incentive to work or invest in human capital (education). Modern adaptations to property taxes are a tax on the increase in land values due to changes surrounding the site. Some economists also favor a higher proportion of property taxes on land as opposed to improvements on the property, as a way of maintaining investment incentives.
7. Advocates of a single tax on land recognize that tax revenue today would be insufficient, even though property taxes, including improvements, are a major source of local jurisdiction revenues. Is the distribution of property assets "fair" historically or following market transactions.