Notes.102.Section2 - EEP 102/Econ 102 Lecture Notes: Land...

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Unformatted text preview: EEP 102/Econ 102 Lecture Notes: Land and Water Resources Prof. Dave Sunding 326 Giannini Hall 2-8229 sunding@are.berkeley.edu 1. Economics of Land Use and Land Rent Concept of Economic Rent Prior to the Industrial Revolution, land represented economic and political power. Adam Smith and others sought to understand the nature of that economic power. They asked what is the relationship between the value of land and the price received for farm products grown on that land? How is the size of the labor force related to the income of the landlord and the price of farm products? Pivotal idea: value of the product grown on the land spills back into an income to the landowner Some confusing issues. For example, there was a long debate about whether the high price of land made wheat expensive or whether the high price of wheat made the value of land high. 2 Average Product Per Worker Maximum rent achieved by hiring 11 workers, or hiring until wage = MP Equal to area abcd Exceeds rent earned by hiring 10 workers (abcd) There is another way to view the problem Output per worker 180 173 100bu 10 11 wage Workers c c b b a d d MP AP Output per worker 1800/10=180 1900/11=173 100 10 11 wage Workers 3 Revenue is OpAq Total Cost is OAq Rent is OAp Note that if government levies a per-acre tax, optimal output is unchanged. Rent is still maximized where the marginal product of labor equals the marginal cost of labor (wage). Per-acre tax just reduces rent received by landowner. Land tax is said to be neutral in the sense that it does not charge factor usage on output Rise in wage rate to 110 bushels lowers rent to landlord and reduces the number of workers employed. Share of rent relative to total wage depends on shape of MP. This was of great political interest in the 19 th century whether landlords or workers were increasing in their respective shares of output over time. Have been dealing with rent as income to landlord. Now purse idea of rent as price per unit of land. Land Quality and Ricardian Approach to Rent Suppose there are 2 plots of land: A and B: A is very fertile, B less so. MP of labor higher on A than B MP A >MP B Will only plot A be farmed? $ p q A MC Output (Bushels) 4 Workers will be allocated so that marginal productivity is the same on both plots and equal to wage rate. Workers are used on both plots but more on plot A. Rent on plot A is abc Rent on plot B is bed Net product (MP-MC) on marginal land is closer to zero. Does rent on marginal land determine rent on more productive land? Suppose infinitely elastic supply of labor. c MP A MP B a b e d N A N B 100bu wage 5 N A units of labor will be used on plot A and so on....
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This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Sunding during the Fall '07 term at University of California, Berkeley.

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Notes.102.Section2 - EEP 102/Econ 102 Lecture Notes: Land...

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