A-PDF OFFICE TO PDF DEMO: Purchase from www.A-PDF.

com to remove the watermark

McCann Chapter 3 THE SPATIAL STRUCTURE OF URBAN ECONOMY

The Von Thunen Model The Bid-Rent Model for a Firm The Bid-Rent Model for a Residential Household Alternative Explanations of the Convex Relationship between Land Prices and Distance Critiques of Urban Economic Models Conclusions
Appendix 3.1 The Slope of the Rent Gradient in the Von Thunen Model Appendix 3.2 The Slope of the Bid-Rent Curve Appendix 3.3 Land Puchase Price-Distance Convexity Appendix 3.4 Optimum Trip Frequency and Rent-Gradient Convexity
1 of 40

THE VON THUNEN MODEL

Assumptions:
There is a specific market point located at M All land is owned by Absentee landlords All farmers producing the same agricultural good, exhibit the same production technology and the same fixed production coefficients :
1 ton wheat = 1 ha land + 1 unit of non-land inputs

The land is of Identical quality at all locations There is freedom of entry into the agricultural market
2 of 40

Fig. 3.1 THE VON THUNEN LAND-RENT GRADIENT

Rent/Cost

$100
Cost of fixed non-land inputs

$50 $30

M 20 km 50 km
Distance d
3 of 40

Explanation: Fig. 3.1 THE VON THUNEN LAND-RENT GRADIENT

Price 1 ton of wheat at the M is $100 per ton, transport cost t of bringing wheat is $1 per ton km If the farmer was located immediately adjacent to M, d would be zero, as such no tansport costs, $100 sales revenue can be spent on payments to the land and non land production factor input If the non-land inputs require payments of $50, the maximum rent the farmer can pay for 1 ha of land immediately adjacent to M will be $50 Beyond 50km, there will be no wheat produced and sold at M, becouse the market price of the wheat will not cover the cost of producing plus transportation
4 of 40

Fig. 3.2 THE EFFECT OF INCREASED MARKET PRICES ON THE VON THUNEN LAND-RENT Rent/Cost GRADIENT
$150
Cost of fixed non-land inputs

$100 $80

$50

M 20 km 50 km 100 km
Distance d
5 of 40

Explanation: Fig. 3.2 THE EFFECT OF INCREASED MARKET PRICES ON THE VON THUNEN LAND-RENT GRADIENT
The market price of wheat increases from $100 to $150 per ton, this now implies that the max the farmer will be willing to pay for 1 ha of land immediately adjacent to M is $100 The intercept of the land-rent gradient therefore moves upwards from $50 to $100. The maximum land-rent will now be equal to zero at a distance of 100km Exactly the same result as above will also a rise if the required payments for the non-land inputs falls from $50 to zero, with a fixed market output value of $100 6 of 40

Fig. 3.3 THE EFFECT OF TRANSPORT RATES ON THE VON THUNEN LAND-RENT GRADIENT
Rent/Cost

$100
Cost of fixed non-land inputs

$50

M 50 km 100 km
Distance d
7 of 40

Explanation: Fig. 3.3 THE EFFECT OF TRANSPORT RATES ON THE VON THUNEN LAND-RENT GRADIENT
For a market price of $100, and non-land input payments of $50, the maximum the farmer will be able to pay for land immediately adjacent to M will be $50, irrespective of the transport rate If the transport rate t falls from $1 per ton km to $0.5 per ton km, the distance limit of the land which is brought under cultivation to produce wheat for sale at M has increased from 50 km to 100 km Land-rent per unit area x land area = output revenue non-land payments transport costs
8 of 40

Appendix 3.1

The Slope of the Rent Gradient in the Von Thunen Model

(d) = pm iK rS mtd Slope :
price per ton of output at the market M dhaulage distance from the market M i price per unit of non-land production inputs Kcomposite capital good of non-land production input r rental price per unit area of land m total quantity of output produced per time period t transport rate per ton-km pprice per ton of the good at the market S land area employed
9 of 40

LAND COMPETITION THE VON THUNEN MODEL

Von thunen model predicts that the land will be allocated between competing uses in terms of concentric rings around the market point M Ricardian assumptions that the land is allocated according to its most profitable use, or alternatively to the highest bidder, at the location

10 of 40

Fig. 3.4 COMPETING LAND USES IN THE VON THUNEN MODEL

Rent/Cost

$150
Cost of fixed non-land inputs

$100

Rent Gradient for Barley

$50
Rent Gradient for Wheat

M 40 km 50 km
Distance d
11 of 40

Explanation: Fig. 3.4 COMPETING LAND USES IN THE VON THUNEN MODEL
There are two types of farmers, one producing wheat and the other producing barley. The non-land inputs costs for the production of both crops are the same The price of a ton of wheat a the market location M is $100, and that the transport cost t of bringing wheat to the market is $1 per ton km The market price of 1 ton of barley at M is $150 and the transport cost t of bringing it to the market is $2.5 per ton km The land close to the market will be employed in the production of barley, and the land further away from the market will be employed in the production of wheat 12 of 40

THE BID-RENT MODEL FOR A FIRM

Assumptions: There is a market point located at M The land is of Identical quality at all locations Land and non-land production factors are mutually substitutable The transportation of goods to the market M incurs transport cost. The rents payable by the firm will fall with distance, but at a decreasing rate The bid-rent gradient describes a rental slope which is both negative and convex to the origin M
13 of 40

Fig. 3.5 BID-RENT CURVE FOR AN INDIVIDUAL FIRM

Rent/Sq.m

Bid-rent curve for single firm

M
Distance d
14 of 40

A Second Feature of BidRent Analysis

The higher is the position of the bid-rent curve, the lower is the profitability of the individual firm A Firms Budget constraint, the lower are the prices of the land consumed for given sales revenue, the greater is the profitability of the firm Compare two producers producing the same output quantity which sells at the same price per ton at the market M, the rents payable by the flexible firm will increase at a faster rate than those payable by the inflexible firm
15 of 40

Fig. 3.6 BID-RENT CURVE FOR AN INDIVIDUAL FIRM

Rent/Sq.m

BR1 BR2 BR3

M
Distance d
16 of 40

Fig. 3.7 RENTS PAYABLE FOR FIXED- AND VARIABLE-COEFFICIENTS FIRMS

Rent/Sq.m

RD
BR

Distance d
17 of 40

LAND COMPETITION IN THE INDUSTRY BID-RENT MODEL

Assumptions: Supply of land at each location is fixed that all land is owned by absentee landlords Land will be allocated according to activity or persons able to pay the highest rent There are only Three types of activities, namely the Service industry, Manufacturing industry, and Retailing and distribution industry All the firms are homogenous in terms of their production technology and the quantity and value of their outputs
18 of 40

Fig. 3.8 URBAN LAND ALLOCATION FOR DIFFERENT SECTORS

Rent/Sq.m

W
Bid-rent curve for service sector

Bid-rent curve for manufacturing sector

X Y

Bid-rent curve for retail sector

Z RD M ds dm dr Urban land

rA
Distance d

Agricultural land
19 of 40

THE BID-RENT MODEL FOR A RESIDENTIAL HOUSEHOLD (1)

Assumptions: All land is homogeneous, land supply is fixed, all land is owned by absentee landlords, and that land is allocated to the person willing to pay the highest rent The object of the rational individual person is to maximize utility given the choice and constraints facing the person The individual person gains utility from the consumption of both land and non-land humanproduced inputs, and that these are mutually substitutable
of 40 20 of 26

THE BID-RENT MODEL FOR A RESIDENTIAL HOUSEHOLD (2)

Assumptions: There is a geographical point M, represented by the central business district of a city, which all household employment activity is focused The cost of commuting to the central business district M incurs transport costs , land-rents will fall with increasing distance The higher is the position of the bid-rent curve, the lower is the utility of the individual. A persons budget constraint, depending on their employment income
of 40 21 of 26

Fig. 3.10 BID-RENT CURVE FOR AN INDIVIDUAL PERSON

Rent/Sq.m

BR1 BR2 BR3

M
Distance d
22 of 40

Appendix 3.2

The Slope of the Bid-Rent Curve

The Utility Function of individual household:

U = U(K(d),S(d)) MaxU = U(K(d),S(d))

Budget constraint: Y-iK-rS-T 0 Slope :

Y budget constraint determined by the wage income d haulage distance from the central business district i price per unit of non-land production inputs K composite capital good of non-land production input r rental price per unit area of land T total transport costs t transport rate per kilometre pprice per ton of the good at the market S land area
23 of 40

Land Competition in the household Bid-Rent Model Assumptions:

Society is comprised of three broad income groups, namely low income, middle income, and high income Income groups locational preferences Low income: low ability to incur the transport costs associated with anything other than short-distance commuting As incomes increase, individuals have an increasing preference for land consumption, which is stronger than any preference for increased accessibility to the city center.
24 of 40

Fig. 3.11 RESIDENTIAL URBAN LAND ALLOCATION FOR DIFFERENT INCOME GROUPS
Rent/Sq.m

N
Bid-rent curve for low-income group

Bid-rent curve for middle-income group

O P M dL dm dh
25 of 40

Bid-rent curve for high-income group

Q
Distance d

The Treatment of Environment in the Household Bid-Rent Model

Land at different locations is associated with qualitatively different environment City center is the major source of urban environmental pollution. The natural environmental quality of land will increase with distance from the city centre, as it will suffer less from the harmfull effects of pollution Environment may also be considered from the point of view of social amenities. The relationship between the location of land and the qualitative characteristics of the local environment
26 of 40

Fig. 3.14 THE EFFECTS OF ENVIRONMENTAL

VARIATIONS ON BID-RENT CURVES

Rent/Sq.m

A
Bid-rent curve for low-income group Bid-rent curve for middle-income group

B C

Bid-rent curve for high-income group

D M E
Distance d
27 of 40

Explanation:
Fig. 3.14 THE EFFECTS OF ENVIRONMENTAL VARIATIONS ON BID-RENT CURVES The low income groups are constrained to remain close to the city becouse their inability to pay longdistance commuting transport costs On the other hand, the middle- and high-income household may be willing and able to pay higher rents over a range of locations in order to acquire land further away from the centre The shape of the rent gradient ABCDE which at first rises with distance and subsequently falls with distance, can e described as being concave with distance between B and D, but convex between A and B and D and E
28 of 40

Fig. 3.15 DERELICT URBAN LAND

Rent/Sq.m

A
Bid-rent curve for low-income group Bid-rent curve for middle-income group Bid-rent curve for high-income group

E
Distance d
29 of 40

Derelict land

Explanation:
Fig. 3.15 DERELICT URBAN LAND

The rent gradient ABCDE falls to zero in certain areas between B and C, as higher-income groups prefer to pay a rent premium in order to isolate themselve from lower-income groups There will be a band of derelict space which remains largely unoccupied by house-holds The poor security implications of locating in these areas may imply that firms will not wish to invest

30 of 40

Appendix 3.2.2

Enviromental Changes and BidRent

Environmental quality within our utility function:

U = U(K(d),S(d),E(d))

K composite capital good of non-land production input d haulage distance from the central business district S land area E environmental quality r rental price per unit area of land t transport cost
31 of 40

ALTERNATIVE EXPLANATIONS OF THE CONVEX RELATIONSHIP BETWEEN LAND PRICES AND DISTANCE
Limits of the applicability of the bid-rent approach Absentee landlords, rental value purchase price, consumption good investment good Public urban transportation There is 2 types of models, each of which ascribes rent gradient convexity to particular features of the urban land market not fully incorporated in the bidrent model: Urban growth, property asset appreciation, and land price-distance convexity Trip frequency
32 of 40

Urban growth, property asset appreciation, and land pricedistance convexity

R(d)=t(D-d)+rD+k
R(d) the rent per unit area of the developed property D the distance to the edge of the city d the distance of the location of the land from the market orCBD point M t the transport rate per km k the annualized mortgage cost of constructing the housing infrastructure
33 of 40

Appendix 3.3.1

Property Asset Appreciation an LandPrice Distance Convexity : the Role of Urban Spatial Growth

Assuming that i>h P the price of property R the rent of the property t the transport rate per kilometre D the distance to the edge of the city h constant value of growth rate of the urban radius i discounted at a rate
34 of 40

Appendix 3.3.2

Property Asset Appreciation an LandPrice Distance Convexity : the Role of Income Growth in Spatially Constrained City

Assuming i>g P property market price R the rent of the property i discounted at a rate Y the wage income earned at the city centre g the constant long-run rate of growth of centre-city
of 40 35 of 26

Appendix 3.4

Optimum Trip Frequency and RentGradient Convexity

d distance to the city centre r rent per unit area S land area are positive constants the opportunity cost of less than continuous face to face contact
36 of 40

CRITIQUES OF URBAN ECONOMIC MODELS (1)

Monocentricity:
Large cities have many sub-centres, which act as local focal points for business and comercial activity The existence of sub-centers does not pose major problem (overall urban-rent gradient as simply the envelope of two types of bid-rent gradients)

Land supply and land ownership

The quantity of land held by each individual landowner The time period of the tenure of the landowner
37 of 40

CRITIQUES OF URBAN ECONOMIC MODELS (2)

The optimal size of a city: There is no optimal size for a city, but rather that there may be an optimal city size distribution and urban spatial hierarchy. The costs of city dwelling, which include both private and public costs, exhibit economies of scale over a certain range of city size The role of inter-urban migration The market failure argument. When a city expanding, a lack of regulation will tend to mean the city grows too large
38 of 40

CONCLUSIONS
These various institutional and industrial organization issues surrounding the supply of land will tend to affect land prices at the very local intra-urban level. Along with the environmental issues and directly, and the possibility of urban sub-centres, the actual relationships between land prices and location will therefore be rather complex over very small intraurban spatial scales Land prices will tend to fall with distance from the city centre, but at diminishing rate

39 of 40