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Chapt 4 - Garrett Barnes Chapter 4 Problems 2 Explain the...

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Garrett Barnes Chapter 4 Problems 2. Explain the Residual Theory of Land Value. Why is land value only the residual after other factors have been paid? In dividing up the value of the finished product among the four general factors of production, the defining characteristic of land that differentiates it from the other three factors is that land is fixed in location. You can never take land away to some other site where it might be able to earn more rent. The three more mobile factors (labor, raw material, and capital) have to get paid first. The gross value of the production on the site, measured by the total revenue earned by the factory, will therefore go first to the mobile inputs. Only what is left over, after the mobile factors have been paid the necessary prevailing market costs, will there be anything available to the landowner in the form of rent. This is known as the Residual Theory of Land Value.
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