LOCATION STUDIES IN ECONOMICS TO DETERMINE THE VALUE OF LAND.pptx

The paper is about the economic value of location of land in econlmics

1. LOCATION STUDIES There are basic economic and public policy concepts that influence people in their decisions concerning possession and use of land and real estate resources. In decision making process, it is important to consider what is physically and biologically possible, economically and technically feasible and institutionally acceptable. Thus the emphasis on the operation of the economic principles that affect human decisions regarding the acquisition, development, management and use of real estate resources. Land resources play an essential role in supporting human existence and their day to day activities. It provides human beings with living space, with the primary products that support their material needs and with opportunities and satisfactions dear to their way of life.

2. As Henry George (1958, pp 295-96) observed: “…. Land is the habitation of man, the store-house upon which he must draw for all his needs, the material to which his labor must be applied for the supply of all his desires….. On the land we are born, from it we live, to it we return again – children of the soil as truly as is the blade of grass or the flower of the field. Take away from man all that belongs to land and he is but a disembodied spirit.” For long centuries, average men and women everywhere lived in close association with the fields, forests and fishing grounds that supplied their sustenance. Throughout much of the Western world, the major land problem is more one of securing effective and efficient utilization of the land resources needed to provide operators and others with high levels of living than it is one of providing people with adequate sustenance ( Barlowe , 1986, pp.2).

3. Attainment of better operating and living conditions within these areas calls for actions and policies that deal with the different sets of land use problems found at the urban, suburban and rural levels. Urban communities often suffer from congestion, pollution, declining attractiveness, inadequate and insufficient housing, environmental degradation, outward migration of their economic and tax bases and poor growth management. With the outward sprawl of most urban centres, the problem of cities have spilled over into suburban and urban – fringe communities.

4. The concept of land value Classical economists have identified land, labor and capital as the three factors of production ( Vickrey , 1999). Under ‘capital’ was implied all means of production that have been created through human effort while ‘land’ was primarily used to describe natural resources that were not created through human effort. Land value in turn refers to the earnings accruing to land in the process of production. Where land is not put into productive use, the value will be based on the opportunity cost of not putting land in the production process. ‘Opportunity cost’ here refers to the next best alternative use that land could be put to. These earnings may be realized in compact or discounted form and expressed as capital value. The capital value is the basis upon which the exchange price of the land will be considered. Land value therefore refers to a stream of income from land as a factor production considered under a certain or definite period of time. Value in this case is tied to the income generating process will still have its have derived on this basis by relying on the concept of opportunity cost. Opportunity cost would be subject to the prevailing land market conditions.

5. As a factor of production, land like any other commodity, is traded in the market. This means that the price (value) of land will be subject to the economics of demand and supply. In this respect, land becomes a unique commodity since it has unique demand and supply descriptions. Indeed, as a discipline, land economics is based on two basic concepts, namely: that the supply curve of land – as a commodity – is perfectly inelastic ; and that the demand for land is derived demand . Land is fixed in terms of geographical location. For that matter, all economic advantages provided by land must be utilized on site. Location is therefore crucial in determining land values because shortages in supply at one place cannot be made up for surplus at another place. The value of land will be influenced by those economic factors pertaining to the area in which it is situated/located.

6. Theory of Economic Rent In micro - economic theory, economic rent simply refers to any payment accruing to a factor of production over and above payment that is necessary to keep it in production. The payment that is needed to keep the factor in production is known as “transfer earnings” ( Foldvary , 1999). Transfer earnings are payments that would remunerate all the factors involved in the production process at market rates. However, due to increase in demand a factor may earn more than transfer earnings. Land, being a gift of nature cannot be reproduced in greater quantities to meet increased demand. It is therefore, scarce by nature and fixed in supply. Any payment to land over and above the transfer earnings, is thus a surplus.

7. If the supply of a factor of production is responsive to increased demand, more factors will be attracted into the market to meet the increased demand and the surplus payment over and above transfer earnings would be eliminated in the long run. In this case the surplus earnings would be referred to as quasi-rent (Surplus Curve – is relatively elastic). If the supply curve of the factor is relatively inelastic (Supply would not relatively respond to increased demand) more factors would not be attracted into the market to meet the increased demand and the surplus payment tracts or units over and above transfer earnings would persist in the long run. This is economic rent.

8. Land Use-Capacity Land use capacity involves the relative ability of a given unit of land resource to produce a surplus of returns and/or satisfactions above the costs of utilization. This concept, which is closely associated with that of land rent, measures the productive potential of units of land utilized for a given use at a given time with given technological and production conditions. The amount of net return or satisfactions secured provides an index of relative use-capacity. When these indices are compared for particular tracts or units of land resources, the concept of use-capacity provides a common measure of the quality or excellence of the units considered.

9. Use-capacity has two major components- accessibility and resource quality . Accessibility involves the convenience, time and transport cost savings associated with specific locations with respect to markets, shipping facilities and other resources. It is concerned with optimizing transportation and communication costs and time-distance considerations. Resource quality involves the relative ability of a land resource to produce desired products, returns or satisfactions. It may involve aesthetic considerations such as scenery, presence of trees or water attractions, nearness to parks or open space, and access to schools and cultural opportunities. In urban areas, quality can involve items such as functional area planning, neighborhood attractiveness, architectural styling of buildings, and other conditions that affect the satisfactions and values people associate with properties.

10. The concept of use-capacity is used in land economics to distinguish between the comparative abilities of different units of land resources to provide net returns and other satisfactions. From an overall point of view, this concept involves all the factors that affect the ability of a unit of land resource to produce a net return as compared with some other unit.

11. Highest and Best Use Most land areas are suited for a variety of uses. The highly valued land found in most central business districts could be used for forestry, grazing, crop production, or residential purposes as well as for commercial uses. It is used as is it is however, because owners have an economic incentive to use their land resources for those purposes that promise them the highest return. In this respect they allocate their land resources in accordance with the concept of highest and best use. Land resources are at their highest and best use when they are used in a manner that provides an optimum return to their operators or to society. Real estate is ordinarily considered at its highest and best use when it is used for that purpose or that combination of purposes for which it has the highest comparative advantage or least comparative disadvantage relative to other uses.

12. The highest and best use of any particular site is often subject to change. Like the concept of use-capacity, it can shift with changes in the demand picture. In modern society, land resources usually earn a higher return when used for commercial or industrial purposes than for other types of use. As a result, these uses are usually able to outbid other uses for almost any site.

13. Location Theory In location theory, a distinction is made between location theories of the firm, location theories of households and the interaction between the two theories. In the location theory, transportation cost as determined by accessibility is central. The economic theory of urban spatial structures is concerned with how the spatial organization of cities (systems of cities) is determined by economic forces. The minimization of costs theory is one of the longest held principle concerning the order and regularity to spatial urban structure. The basic element in the theory is that the organization of the city reflects the attempts by households and firms to overcome the friction of space.

14. Rent is also included in the costs of friction as it offers accessibility and represents savings in transport costs. R.M.Hurd suggested that the value of land depends upon proximity, while Von Thunen argued that rent increased near the center of the town because the greater convenience of being there saved labor and time. The size and location of cities are dependent upon their functions. Trading centres in which economic activities relatively free of input constraints locate tend to form a hierarchical system of cities. A group of cities and central places in a region is in fact a system of systems of cities.

15. Central place theory Central place theory introduced by Chris taller in 1930’s is the most widely known theory of urban growth. According to the theory, the growth of the city depends upon its specialization in urban services functions while the level of demand for urban services over the service area determines how fast central places grow. The theory also explains the spatial ordering of urban centres over the regional and national economy. The city’s primary function is to act as a service centre for the hinterland around it (called the complementary region), supplying it with central goods and services such as retail and wholesale trade, banking, and administrative services e.t.c . Two key concepts determining why certain goods and services are offered only centrally and the factors affecting the size of the central place offering a particular service are the demand threshold and the range of a good.

16. The threshold – is defined in terms of the minimum level required to support a service and can be expressed in terms of population and/or income. The threshold occurs when sales are just sufficient for the firm supplying the service to earn normal profits. It reflects economies of scale in the provision of certain services and agglomeration advantages accruing from locating centralized services establishments near to each other. The range over which a service is supplied is affected by economic distance. The range of central goods may be extended by technical progress and its impact in reducing transport and/or production costs. If we assume transportation is possible in all directions from the central place at the same cost, the threshold of a central good can be represented by the smallest concentric forming the outer boundary. This outer ring will delimit the complementary region. It will vary in size for different goods and services. The growth of consumption of central services and the development of central places may be stimulated by several factors;

17. High population density – makes for more frequent social contacts boosting demand through a form of ‘demonstration effect’. Rising income The level of cultural development and region’s social structure, since central services are of cultural nature. The degree of competition among establishments supplying central goods and services. The central place hierarchy results from definite relationships between the size and functions of central places and inter-urban distance .

18. Approaches to Urban Growth The urban economic base and growth. The human ecological approach to urban growth. Human ecology may be defined as the study of movements and settlement of human populations as affected by their natural, social and cultural environments. To human ecologists the city is a natural environment . The communications theory as urban growth Meier conceptualizes the city in terms of human interaction. Transportation and communications are the main media for interaction. City size and urban growth.

19. References Nourse , 1.0; Regional Economics, Publisher – Mc Graw – Hill Book Company; Pages 31-62 RICHARDSON, H.W ; REGIONAL ECONOMICS; Pages 119-131; 145-185 LLOYD, P.E and Dicken, P; LOCATION IN SPACE; A THEORETICAL APPROACH TO ECONOMIC GEOGRAPHY, page 20-84:Harper and Row Publishers London New York