Urban land (location) supply is fixed and the marginal cost of bringing an urban plot into production is zero. Even when land owners do not collude to limit the supply, the fixed supply arguably results in the same market power (monopoly rent).

If urban land (locations) could indeed be replicated, wouldn't that imply that demand would move to rent-free land on the edge of civilisation thereby driving the urban land (location) market price to zero? In the absence of the latter doesn’t the presence of rent in the urban land (location) market imply that it is not competitive?

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    $\begingroup$ Is any market considered to be competitive? I rather see perfect competition as a relevant benchmark case. For example, look at the conditions listed here: en.wikipedia.org/wiki/Perfect_competition Would you say that these coditions are satisfied in many (any?) real-world markets? $\endgroup$ – Bayesian Nov 16 '20 at 10:35

Existence of rent has nothing to do with whether market is competitive or not. First there are different definitions of rent. As explained in the Palgrave dictionary of economics (Alchian 2017):

Rent’ is the payment for use of a resource, whether it be land, labour, equipment, ideas, or even money. The term is often restricted to payment for use of land or equipment. ‘Economic rent’ is payment for use of any resource whose supply is fixed. Rent serves a social purpose because market levels of rent indicate which uses of fixed resources are the highest valued, and direct such resources to those uses. ‘Monopoly rent’ is paid to producers in markets that are artificially restricted; it may be dissipated by ‘rent seekers’ who compete for monopoly status.

Hence rent can have various meanings depending on the context. Only the last definition of rent that is:

‘Monopoly rent’ is paid to producers in markets that are artificially restricted; it may be dissipated by ‘rent seekers’ who compete for monopoly status.

Has anything to do with competition. Even here there must be some artificial restriction on the market so there is some monopoly (i.e. one seller). All other definitions of rent have nothing to do with competition and some of the above definitions are fully compatible with perfect competition (e.g. even if there would be perfectly competitive market for land and there would be some marginal costs of making it productive - which there actually are although usually they are small (you have to maintain land for it to be usable for housing etc) - the perfectly competitive price for land would still be called rent).

For example, it can trivially be proven that in oligopolistic competition firms can make positive profit, and prices will be higher than marginal costs (see examples Belleflamme & Peitz Industrial organization: markets and strategies). However, oligopolistic profit would not be considered monopoly rent - even if firms have market power.

In order to have monopoly rent in this case you need to make argument that the plot of land is sufficiently distinct from other plots of land so it can be considered to be unique and its owner would thus become a monopolist because there would be only one seller of this one unique piece of land. You can probably make this assumption for any special location (some place with unique excellent view) or locations with some historical value making them special (e.g. land under the White House), but such assumption would be inadequate for any random slot of land in some city. In many cases all plots of land in a given block or even in a whole section of city can be treated as completely homogenous without loss of generality.

  • $\begingroup$ Competition according to Mankiw (Principles of Microeconomics, 7th Edition, p.280): 1. There are many buyers and many sellers in the market. 2. The goods offered by the various sellers are largely the same. 3. Firms can freely enter or exit the market. Arguably in the land market firms cannot enter even in the long run. $\endgroup$ – sba222 Nov 17 '20 at 12:58
  • $\begingroup$ I've asked this in a new question: What is the difference in outcome between supply being fixed by nature and supply being fixed by a monopolist. economics.stackexchange.com/questions/40897/… $\endgroup$ – sba222 Nov 17 '20 at 13:03
  • $\begingroup$ Schwerhoff et al consider market power per se a source of rent: onlinelibrary.wiley.com/doi/full/10.1111/joes.12340 $\endgroup$ – sba222 Nov 17 '20 at 13:04
  • $\begingroup$ @Steve222 that is definition of perfect competition, not competition. Also, note I never claimed that market for land is perfectly competitive I just said that if it would be perfectly competitive the price for land would still be called rent under the other definitions of rent as clearly the source above shows (and Palgrave dictionary of economics is the leading dictionary for economic jargon so it is quite an authoritative source). Also note market does not need to be perfectly competitive for there to be no market power. Monopolies with no market power exist. $\endgroup$ – 1muflon1 Nov 17 '20 at 13:05
  • $\begingroup$ Mankiw writes "A competitive market, sometimes called a perfectly competitive market". I think that is a moot point. Obviously in a physical world there will always be some lack of competition. But what you say leads me back to my original question: Is the urban land (location) market considered competitive despite fixed supply resulting in rent? Please also see my new question linked above to clarify this. $\endgroup$ – sba222 Nov 17 '20 at 13:16

We could argue about some of your assumptions, but that would lead to unnecessary opinion-based discussion.

In a (perfectly) competitive market everyone is a price taker. This is not the case here. Therefore, it is not a perfectly competitive market.

However, before this is taken as a reason to radically restructure society and property rights, you should know that perfect competition is a theoretical benchmark case. See it like the "perfect vacuum" in the Physics classroom -- it is a very important benchmark case that assumes away real-world frictions. As a start, you can check out this wikipedia page. There are many reasons why a market may not be competitive and in reality almost always most of them apply.

  • $\begingroup$ Do you say the land market is competitive or it is not competitive but that that is irrelevant because perfect competition does not exist in practice. NB. In the UK 51% of net assets are capitalised land rents. Clearly that is a very substantial deviation from the theoretical benchmark of a competitive market. ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/… $\endgroup$ – sba222 Nov 17 '20 at 13:05
  • $\begingroup$ It's not, because perfect competition is a theoretical construct. However, perfect competition can still be a very good approximation, see the other answer. It can be very helpful to keep models tracktable that focus on other aspects of the economy. $\endgroup$ – Bayesian Nov 17 '20 at 13:29
  • $\begingroup$ The fact that rent in a city is higher than in rural areas first of all just reflects that (for whatever reason) people prefer to live in the city, and land in the city is not a perfect substitute for land outside of the city. $\endgroup$ – Bayesian Nov 17 '20 at 13:34
  • $\begingroup$ Based on the definition of a competitive market provided by Mankiw (in the comments above) if the market for urban land was competitive new firms would enter and supply more urban land. That is not the case. It would follow that the urban land market is not competitive. If that is the case, should or could competition be restored? Or is the urban land market competitive despite not complying with the definition of a competitive market? $\endgroup$ – sba222 Nov 17 '20 at 13:53
  • $\begingroup$ Fostering competition usually (not always) increases welfare and is therefore good policy. However, I fear that reaching "perfect competition" is not possible, by saying "restore" you seem to assume that it is somehow a "natural state," but it is not. $\endgroup$ – Bayesian Nov 17 '20 at 13:58

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