Sunday, 14 June 2015

Killer Arguments Against LVT, Not (363)

From Facebook:

What happens when the building is larger than some small towns and the location is all inside?

What happens when prefabrication makes construction so cheap even the middle class can afford to live there (and never has to leave to go to work, shop, get entertained etc)? What is the value of location then and what is the proper LVT to impose?


No need to speculate, as we know perfectly well.

1. Very tall or large buildings are only built in already densely populated areas, where land values are already high, so no practical or conceptual problem with valuations.

2. It makes no sense to build them out in the middle of nowhere, which is why this seldom happens (except maybe power stations and Arabs showing off), but if somebody were daft enough to do so, then the chances are that the location rental value would be nil or negligible.

3. Construction costs have got little to do with final selling prices. Final selling prices are fixed by the market, you subtract construction costs to arrive at residual land value.

4. The size or shape of the development (vertical city or horizontal city) is irrelevant, the total location value is independent of this.

5. There is no town or country on earth so large that "the location is all inside". At international level it is about trade. If we impose a trade embargo on Rhodesia, Iran or Russia and actually enforce it, we would see that living standards in the embargoed country would drop a lot and living standards in the rest of the world would drop a little bit.

The smaller the country being embargoed, the larger the loss to that country and the smaller the loss to the rest of the world.

6. If the owners of the building argue that all the value is internally generated and refuse to pay the appropriate LVT, then what happens if the government goes beyond a simple trade embargo and withdraws the police and fire brigade, builds a brick wall round it and cuts off water and electricity? What is the location value then? Nothing.

Therefore, any value in excess of 'nothing' is not generated internally, but by the benefits people on that site can access from the rest of society.

6 comments:

Bayard said...

"then what happens if the government goes beyond a simple trade embargo and withdraws the police and fire brigade, builds a brick wall round it and cuts off water and electricity? What is the location value then? Nothing."

An example of this at the extreme is the island of St Kilda. For centuries it "belonged" to a landowner on the mainland and was part of the UK, but the inhabitants paid no rent and they received nothing in return. The island was almost totally self-sufficient.

However, if the building declared UDI and provided its own electricty, police force etc. then it could continue to thrive, but there would have to be a system of internal taxation to pay for this and we would be back to square one.

Mark Wadsworth said...

B… " if the building declared UDI and provided its own electricty, police force etc. then it could continue to thrive, but there would have to be a system of internal taxation to pay for this and we would be back to square one."

Exactly. (only, being cut off from the outside world, it would not thrive at all).

Random said...

http://mobile.news.com.au/finance/economy/tony-abbott-says-his-daughter-proves-it-is-possible-for-young-people-to-get-on-the-property-ladder/story-fnu2pwk8-1227392710384
More Abbott brilliance.

Random said...

If the owners of the building argue that all the value is internally generated and refuse to pay the appropriate LVT, then "what happens if the government goes beyond a simple trade embargo and withdraws the police and fire brigade, builds a brick wall round it and cuts off water and electricity? What is the location value then? Nothing.

Therefore, any value in excess of 'nothing' is not generated internally, but by the benefits people on that site can access from the rest of society."
Couldn't this argument be made about anything though? Essentially what you are saying is "we rely on public goods."

Mark Wadsworth said...

R, "Couldn't this argument be made about anything though? Essentially what you are saying is "we rely on public goods."

Well it could be made, but it's not a very good argument. You could take the argument to the extreme and say "Without oxygen all human life on earth would cease within a few minutes. Therefore the entire value of everything is derived from oxygen". This is a philosophical point not an economic one.

What we are trying to identify is the location value.

So manufacturer A has his factory near a population centre, with plenty of potential workers and good transport links to bring stuff in and out, his product sells for $10.

Manufacturer B has his factory miles from anywhere, so has to offer higher wages to compensate people for the commute time, the only access is winding country lanes so there are often delays in getting stuff in an out and it costs more money, his product is identical and also sells for $10. his extra travel and transport costs are $1 million per year.

Clearly, in either case, the bulk of that $10 for the finished product is wages and return on capital, it is earned income and net wealth created. Society (or nature) just provides the general framework (like oxygen), not the $10.

Site A clearly has a higher value, which we can arrive at using Von ThĂĽnen's law of rent. Iit is the inverse of transport/travel costs.

In other words, manufacturer B would actually be indifferent about paying $1 million a year (rent or LVT) to occupy Site A because it would save him $1 million transport and travel costs.

Bayard said...

"In other words, manufacturer B would actually be indifferent about paying $1 million a year (rent or LVT) to occupy Site A because it would save him $1 million transport and travel costs."

Which is why building fast roads to isolated places doesn't help business in those places, as it is purported to do. All that happens is B ends up paying more rent and A can now compete more effectively with B on B's home turf. However , it does benefit landowners, which, I suppose is the real reason for doing it. See also HS2.