Chapter 8 Land 1

CHAPTER 8

Economics of land use

Chapter 8 Land

Overview of items

• Introduction to the subject; what are typical questions?

• Land as a non-renewable natural resource• Sustainable land use• Land rent theories• Relationship between land rent and land price• Changes in land use Rural economic

development• Conclusions

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Chapter 8 Land

Typical questions

• What determines land rent?• How are rural activities influenced by land rent

(or is it the other way around)?• What determines land prices?• What is the adequate level of aggregation

(parcel; operational unit (farm); sector; area)?• Does ‘zoning’ contribute to a better land use?• What is the influence of nearby cities / towns on

land rent / land prices?

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Chapter 8 Land

Land as a non-renewable resource

• Renewable natural resources– Solar energy (+ wind, rain)– Fish, forests, etc

(remark: stock and flow!)

• Non-renewable– Minerals– Oil, gas– Atmosphere?

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Sustainable land use and institutions

• Sustainability

• What is sustainable land use?

• Why are institutions important?

5Chapter 8 Land

Sustainability (definition)

• “the ability of Humanity (….) to ensure that it meets the needs of the present generation without compromising the ability of future generations to meet their own needs”(Brundtland report, 1987)

• Dynamic concept

• Sustainable Unsustainable6Chapter 8 Land

Dimensions of sustainability

• Ecological

• Economic

• Social

• One framework?

• Role of Institutions?

7Chapter 8 Land

Institutions (definition)

• “the humanly devised constraints that structure policy, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws and property rights)” (North, 1991)

• Institutions create order and regularity

8Chapter 8 Land

Level Time horizon (years)

Core elements Examples in relation to land use

I Social embeddedness

100 to 1000 Informal rules of society, traditions, norms, religion

Property is acknowledged? Do individual or common property rights hold; Access of civilians to land?

II Institutional environment

10 to 100 Formal rules in the constitution, laws, formal rules and the formal organization of society

Land property rights; inheritance; land tenure law; enforcement of laws and regulations

III Institutional arrangements

1 to 10 Governance structures which rule processes and provide co-ordination

Land markets; rental markets; land redistribution; contracts for landscape and nature provision

IV Resource allocation

Continuous Choice of input and output levels by agents

Selling or buying of land; renting in and out of land; crop choice; fertilization

Four levels of structuring human decision-making in relation to land use

9Chapter 8 Land

Institutional causes of unsustainable land use

• Conflict with social embeddedness (informal rules)

• Institutional environment is not adjusted to present / future land use (e.g. land ownership)

• External effects are not considered• Institutions arrangements for efficient land use

are not allowed• Highly unequal land distribution• Etcetera, etcetera

10Chapter 8 Land

Institutional aspects of land ownership and land use I

• Ownership; transfer of ownership rights– Private– Community– State– Bundle of property rights

• Land rent / land rental market– Less => More efficient user– Related markets:

• Labour• Credit

11Chapter 8 Land

Institutional aspects of land ownership and land use II

• Contract choice– Cash rent– Share cropping– Contract period

• Different functions of land use– In time– In place– Positive / negative external effects

12Chapter 8 Land

Item Low level of development High level of development

Ownership rights Incomplete and partly based on informal arrangements

Clearly described, but often restricted by general rules of society

Land rental market Often poorly functioning; goes by informal rules of local communities and (limited) formal rules

Rental markets, which are sometimes adjusted to the need of specialized contracts

Contract choice Relatively more share cropping

Mainly cash rent

Different functions of land use

Agricultural production-oriented / partly self-subsistence

Market-oriented and sometimes multifunctional land use

Land use under two stylized institutional settings

13Chapter 8 Land

Chapter 8 Land

Land rent theories

• Land quality related (Ricardo)

• Location related (von Thunen)

• Marginal value of product (Neo-classical economics)

• Institutionally determined

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Chapter 8 Land 15

Ricardo’s differential land rent theory

RL (qs|p0)

L1 L

Land; ordered in land qualityRL (q|p)

L0 L2

Land rent theory (von Thünen)

16Chapter 8 Land

Chapter 8 Land

Rent bid functions (von Thünen)

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Preliminary evaluation• Ricardo’s theory is focusing on land quality in a

situation of sufficient land availability (product price is important)

• Von Thünen’s theory is based on distance to a city (location and transport costs are important)

• Neo-classical micro theory is gives a wider basis to land rent explanation, but pays no or limited attention to land quality and location

• Rent Bid Functions originate from a more empirical approach: what determines land rent and land prices?

18Chapter 8 Land

Chapter 8 Land

Basic approaches in determining land rent (neo-classical)

• Production function / Marginality condition (V=variable input; L=Land; p=product price)

rentLandsMPVpL

Q

TechLCapLabVQQ

LL

),,,,(

This implies that the land rent depends on: p, pv (=variable input price; why?), Lab, Cap, TechLab and Cap are also quasi-fixed inputs

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Chapter 8 Land

Starting from the profit function (neo-classical)

• Shadow price of land is the first derivative of the profit function to land

),,,;,(

),,,;,(

TechLCapLabpvpsL

s

TechLCapLabpvp

LL

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Chapter 8 Land

Rent bid function

• Identical to:• Marginal product value of land (MPVL)• Shadow price of land (sL)• General form; institutional aspects

added (RBP)

.),,,,,,( etcInstTechCapLabpvpRBP

RBPsMPV LL

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Institutional variables

• Institutional variable require clear definitions (all in relation to land use):– Social embeddedness (informal rules)– Instituitional environment (formal rules)– Institutional arrangements

• Important is the timing of variables (many are slowly changing!)

22Chapter 8 Land

Chapter 8 Land

Relationship between land rent and land price

Land rent (R)• Continuous land

rent of R

• If future option exist of (say) a much higher rent Rf (+ instantaneous shift)

Land price (P)• Given a discount rate i,

then

• Land price:

• Property rights / Taxes

11 )1()1( Stt

S

tt i

Rf

i

RP

i

R

i

RP

tt

1 )1(

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Chapter 8 Land

Land price function

.),,,,,,( etcInstTechCapLabpvpRR

Marginal product value / shadow price / Rent bid function:

),,,,,,,(),,( InstiTechLCapLabpvpPInstiRPP

This gives a land price function:

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Chapter 8 Land

Hedonic price function

),,;,.......,( 1 SBMXXPP IGeneral

Where: P= PriceX=Characteristics of the piece of land (i=1,…,I)M= Market characteristicS= Characteristic of the sellerB=Characteristic of the buyer(M, S and B might be vectors)

Linear specification with error term

SBMXsXscP II.....11

s, φ,β and γ are shadow prices of characteristics

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Chapter 8 Land

Land price characteristic

Min WTA

Max WTP

Min WTA

Max WTP

Price

XiXi* Xi**

No Excess Surplus (S)

No Excess Surplus (S)

P=P(Xi|Xj≠i)

Characteristic 26

Chapter 8 Land

Local land market; rather homogenous buyers and sellers (example)

radius

Parcel

(Potential)Seller

(Potential) buyer

Choice of radius!

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Chapter 8 Land

Effect of nearby cities / towns

• where Popk is the number of inhabitants of urban area k and

• di,k is the distance between parcel i and the k-th urban area

(observe similarity with gravity equation (see chapter 13); requires quite some detail in empirical work)

K

kkiki dPopR

1

2,

Reilly Index (an example!)

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Chapter 8 Land

When land abandonment / Land pressure?

Abandonment

• Marginal Product Value of land ≤ 0

• Land property rights remain or no future option value;

Land pressure

• Marginal Product Value of land in alternative use is (much) higher than in present use

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Chapter 8 Land

What determines land prices? (1)

• Natural conditions– Soil– Climate– Geology

• Resource availability– Population– Labour/Empoyment– Land– Capital, etc.

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Chapter 8 Land

What determines land prices? (2)

• Technology– Main process– Alternative options

• Economic conditions– General economic development– Output prices– Input prices– Transport costs– Upstream and downstream industries (if relevant)

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Chapter 8 Land

What determines land prices? (3)

• Future alternative options– Land development (industry, infrastructure,

residence area, etc.)– Nature / landscape preservation

• Institutional factors– Property rights– Taxes

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Drivers of agricultural land prices in selected EU member states I

Drivers Belgium Finland France

Agricultural commodity prices +++ + ++

Infrastructural expansion ++ 0 +++

Urban pressures +++ 0 +++

Direct income support (SPS) + ++ +

Farm size ++ + +

Coupled subsidies ++ - +

Informal institutions 0 ++ 0

Interest rate + 0 +

Source: Swinnen, et al, 2008

Drivers of agricultural land prices in selected EU member states II

Drivers BE FI FR

Agricultural productivity 0 + +

Bio-energy 0 0 ++

Other subsidies 0 ++ 0

Rural development policies 0 ++ 0

Taxes + 0 0

Inflation 0 + 0

Land sale regulations 0 0 -

Other factors +++ +++ ++

Source: Swinnen, et al., 2008

What is important for rural areas?

• Link between land- and labour use

• Upstream and downstream industries

• Attractive landscape/environment for citizens

• Land use fits institutionally

• Sustainable land use (dynamic perspective)

35Chapter 8 Land

Chapter 8 Land

Conclusions• Land is the crucial production and location factor in

rural activities• Land prices (if market driven) reflect land scarcity;

now or in the future• Activities with higher rent levels replace activities

with lower rent levels• Land markets are influenced by many factors;• Dynamics of rural areas => reflected in land prices• Hedonic prices is one of the ways to determine the

effects of factors on land prices• There are ways to include location in the analyses

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Chapter 8 Land

Some articles• Rosen, S. (1974) Hedonic Prices and Implicit Markets: Product

Differentiation in Pure Competition." Journal of Political Economy 82 (1): 34-55 (classic on hedonic pricing)

• King, D. A. and Sinden, J. A. (1994) Price Formation in Farm Land Markets. Land Economics 70 (1): 38-52.

• Shi, Y. J., Phipps, T. T. and Colyer, D. (1997) Agricultural Land Values Under Urbanizing Influence. Land Economics 73(1): 90-100.

• Cavailhes, J. and Wavresky, P. (2003) Urban Influences on Periurban Farmland Prices. European Review of Agricultural Economics 30 (3): 333-57.

• Plantinga, A. J., Lubowski, R. N. and Stavins, R. N. (2002) The Effects of Potential Land Development on Agricultural Land Prices. Journal of Urban Economics 52 (3): 561-81.

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