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week2lecture

# week2lecture - Land Use Economics Lecture Notes Land Rents...

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Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics Land Use Economics Lecture Notes: Land Rents, Accessibility and Urban Form Based on Urban Economics by Arthur O’Sullivan Notes by Austin Troy

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Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics Land Rent vs. Market Value Market 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 costs
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics What is 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

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Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics How is PV discounted? PV takes into account the fact that a dollar earned 5 years from now if worth less to us now than a dollar earned today This 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 investment
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics How is PV calculated? For \$20 yearly stream for 5 years at 10% PV= \$20 +\$18.18 + \$16.53 + \$15.04 + \$13.70 = \$83.45 For a constant stream of income into infinity, rule simplifies to PV= R/i = \$20/.1= \$200 Non-constant income example: PV= \$20 + \$24/1.1 + \$29/1.21 + \$34/1.33…etc. = + = n t t i R PV 0 ) 1 (

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Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics Market value of land Equals PV of annual maximum rental payments that the landowner can charge For 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 elsewhere From here out we talk of land rent in place of price, and assume users of land pay rent
Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics Land Rent and Productivity Value of land, and hence land rent derives from productivity Earliest model of productivity comes from Ricardo (1821) who looked at land fertility Assumptions: 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 farmers

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Lecture by Austin Troy University of Vermont, based on Arthur O’Sullivan, Urban Economics Ricardo model On fertile land, a farmer can produce same amount of corn with fewer inputs The price of this type of land is bid up All profit accrues to the landowner in the form of rents Payment to farmer is considered a cost
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