The Invisible Hand, Car Parks, Town Planning and Urban Sprawl

Four related topics which I will condense down to one post

1. The Invisible Hand

Adam Smith coined the phrase The Invisible Hand to explain that markets do not need government intervention and control, if you leave people to get on with things, then by and large, this will lead to an optimal allocation of efforts and resources.

(Clearly, this works well up to a certain point, but let's not worry about the various obvious exceptions to the rule).

a) But it doesn't work with land use once you have private land ownership.

At the "free market" end, where The Invisible Hand works well, let's imagine a public beach which people can use for free.

Some areas are better than others:
- if the tide is coming in, you want to be further up, if the tide is going out, you want to be further down;
- you want to be not too far from the beach shop, the car park, the public toilets and shower block, but not too near either;
- some areas nearer the cliff or the sea wall are better protected from the wind;
- people might prefer sunnier or shadier areas;
- people like having a bit of space round their little 'area' so they prefer the areas with fewest other people.

So the first to arrive will choose the best mix, and the next to arrive will choose the second best mix, and so on, all taking up much the same area for towels, windbreaks etc. If it's a nice enough day and the beach is long enough, people will start making a trade off between 'facilities' and 'space', so they might prefer being wedged in between some early arrivers at the shop/car park end to having more space several minutes walk away which will be under water in a couple of hours.

If you leave people to themselves, you'll end up with the optimal allocation; lots of people fairly close together in the best bits and very few people scattered far apart on the worst bits. As soon as one group leaves, others will spread out a bit to use the space.

At the end of the afternoon, everybody packs up and goes home, and the next time the weather is nice at the weekend, the process starts again.

b) Now, what happens if that public beach is parcelled up into equal sized squares of a few yards each, from the cliff right down to the low-tide mark and one is given or sold to each local household. Let's assume that occupation/trespassing is strictly enforced and that wardens go round checking that nobody is using somebody else's patch…?

Whatever happens, the allocation would be nowhere near as efficient as with the true 'free market' example a).

2. Car parks and retail

Turning to my favourite way of illustrating this in real life - car parks and retail.

a) When a developer acquires a very large area to build his retail park/shopping centre, he will devote about half the space to car parks. That's just the way things are. He knows that his tenants will be able to sell more stuff, employ more people and pay higher rents than if he has just shops and no parking spaces. And people like choice, so you'd rather go to a retail park/shopping centre with hundreds of shops than one with dozens of shops etc.

b) At the other end of the scale are proper 'high streets', where people go when they don't have to carry lots of stuff home. So 'high streets' are ideal for pubs and restaurants; doctors, dentists and estate agents; corner shops for a pint of milk or a packet of fags. Ideally you build up a few storeys and have shops/pubs at ground level, doctors and dentists on the first floor and flats above that.

But in popular belief, 'high streets' are where people are supposed to do all their shopping, including occasional stuff like furniture or a few fridge. It's nonsense, but let's run with it.

So let's a take somewhere in the middle, if there are dozens of small shops and very few parking spaces, they'll be struggling to sell much in the way of physical goods. But we know from our heroic developer in 2 a) that if we were starting from scratch, half the available land would be devoted to car parking spaces. So logic says, the best thing all the little shopkeeperes/landowners could do is knock down all their little shops and start again; even if they 'lose' half the space to the car park, they will still be able to sell more stuff overall from what's left.

Which doesn't happen. Because the incentives are hopelessly misaligned. Each individual shopkeeper/landowner wants to maximmise his sales so he leaves his shop standing. If all of them collectively wanted to maximise their sales they'd knock it all down and start again. Also known as first mover disdvantage. The Invisiable Hand (where there is always a first mover advantage) does not make an appearance, unless the Very Visible Hand of the local council - in cahoots with a well financed developer - does compulsory purchase orders and railroads it all through etc.

3. Town planning

Bearing all this in mind, it baffles me how we ever end up with existing town centres.

Our starting point is a collection of mud huts and wooden cottages thousands of years ago. New arrivals build round these in concentric circles, but the land is divided up into thousands of small plots, each jealously guarded by its owner.

Sooner of later, there is pressure to build a proper town centre, with a Town Hall, a train station, wider streets and a pedetrian precinct, a car park, a public park, big office clocks and a shopping centre. Even though there is a first mover disadvantage for each landowner. And somehow or other, many town centres end up like this, some more than others.

I'll leave it to you to try and piece together the historical process by which this happens, or why it happens in some places and not others. Your guess is as good as mine, to be honest. It might be cause and effect. Perhaps what we now see as 'the town centre' was originally built off-centre where larger areas of land could be acquired more easily/cheaply, and somebody took a leap of faith and built it, and then the town continued to expand round it (like an oyster developing a pearl round a grain of sand). And those towns where nobody had this vision simply stopped growing?

The same dillemma applies in spades to urban parks. No individual landowner would benefit from declaring his land to be a public park (although some Victorian philanthropists did so, bless them), unless he also owned a lot of the surrounding land and developed it for residential, knowing that he can demand a higher price for housing near the park. So in most cases the Very Visible Hand of the town council has to come along and declare something to be a public park, end of, and no back chat.

4. Urban sprawl

This is universally decried as A Bad Thing, but if you understand the issues above, it is clear that this is inherent with private landownership.

If there is one access point to a very large beach (car park, shop, toilet block etc) then people will gather round it, moving closer together in the good locations, beyond a certain distance, there won't be anybody. The 'sprawl' is self-limiting. I'm not making this up, a classic example of such a beach is Rhossili Bay on the Gower Peninsula. There's basically one access point, where the photo was taken. The far end of the beach is usually deserted, even if the first few hundred yards of it is 'full'.

So it's only because The Invisible Hand doesn't work that Urban Sprawl is an issue. If the first mile of Rossili Beach had been parcelled up as outlined in example 1 b) above, then people from elsewhere who want to visit would have to trudge a mile past the privately owned squares (many of which will be empty on any given day) to find one of the unclaimed spaces. So far fewer people would visit. Fail.

It's exactly the same with town planning, exacerbated by this flawed idea of the Hallowed Green Belt. I've done three examples with the same amount of developed i.e. useful land, I haven't drawn all the connections like roads, railways, water and sewage pipes, electrictiy and gas, but it must be clear that you want to minimise on this with A or B you need the least (surprisingly, A requires less than B, but that's a maths thing) but with C you need the most, which will devour as much land again as the actual developed areas.

A. We know that the ideal kind of town is spread out along branches (see here). Everybody gets benefit of being near the centre and near the countryside:


B. If you have a fairly strict green belt policy, you end up with a second best solution. People are nearer the centre but further from the countryside:


C. The worst of all worlds is the very strict green belt, so towns only grow to a certain size and then another New Town springs up on the other side of the green belt. We're all near the countryside but nobody is near the centre, as there isn't one. You waste all the extra money and land on trunk roads etc and you don't get the agglomeration benefits - the dark grey shaded bit in examples A and B:


5. So is there a 'solution' to all this?

There is no perfect single solution to all this, but you can ameliorate it by making it all more free-market again, which counter-intuitively can only be done by some sort of collective action:

a) Replacing other taxes with Land Value Tax, obviously. With LVT, there would be less need for Green Belt policies, sprawl would be self-limiting.

b) Having more land owned by the local council in the first place, who can take the larger view, or owned by large landowners who are paying full-whack LVT and are in it for the money and the larger view rather continuing doing what they are doing for sentimental reasons or sheer inertia.

c) Make smaller landowners (all the little retailers in dying town centres with no parking) pool all their land, so that instead of owning one shop out of a hundred, you are now a one-per cent shareholder in a company which owns a large area. Then slap the company with the higher LVT it can earn buy redeveloping as a coherent whole. The company decides by majority what it is to do, all it takes is one person to have the initiative and to offer to redevelop the whole lot, so you vacate your little unit and after a year or two you can now rent back from the company one unit to re-start your business, assuming it was a viable business to start with, and still collect your dividend of one per cent of the profits.

"Amy Childs enjoys another date with Adam Smith... days after confirming their blossoming relationship"

From The Daily Mail:

After revealing that she wants to find a moral philosopher of her own, it appears that she's getting closer to achieving her lofty goal. Amy Childs was spotted going to dinner once again with 18th century economist Adam Smith in Brentwood, Essex, on Thursday.

Former TOWIE star Amy recently confirmed that her first date with the dour Scot was at the dining hall at Balliol College, Oxford over two centuries ago.

With her fiery red hair blowing in the inclement weather, Amy donned a layered form-fitting black dress, which showed off her cleavage thanks to its plunging neckline. Walking beside the tanned beauty, Mr Smith wore his customary powdered wig and dark frock coat.

The Invisible Hand

... is the expression used, among other things, to describe the phenomenon that even though the private economy is split up into lots of smaller organisations, some co-operating and some competing, when you look at it as a whole, it looks as if it had been deliberately organised that way to achieve a reasonably near-optimum level of output, employment, profits etc. (in the absence of state intervention and natural or government-granted monopolies and so on).

So the Honda car you bought from the Honda showroom was not really built and sold to you by one huge organisation called "Honda". There is an endless chain of sub-contractors, suppliers, franchisees and so on. For some reason, things tend to work slightly better this way, if there are lots of smaller enterprises, each focussed on doing one or two things really well.

Now, if the entire Somerset Levels were owned by a single landowner, it seems likely that he would have looked after his own interests by dredging rivers, digging more channels, keeping certain areas forested, leaving marshy bits at the edge of rivers, building his buildings on stilts or on higher ground (or whatever it is that he would do) and so on.

But the Levels are owned by 1,000 farmers with an average of 170 acres each (source). Each of them is trying to get as much out of his little bit as possible, so the farmers on higher ground chop down their trees; the ones near the river want to use all the land rather than leave it fallow; if your farm is on low lying ground, that's where you'll build your buildings; I'm not aware that they all chip in to a common fund to dredge rivers.

UPDATE: they do have Drainage Rates actually, see comments.

And so things go wrong, and when things go wrong, they all start whining that it is the government's responsibility. I suppose it is true that the government absolved them of this responsibility and then messed up, but all the same, it illustrates the general observation that once it comes to land ownership, The Invisible Hand simply does not function (which in turn suggests that land ownership is the result of state intervention or a monopoly situation).

See the related topic of retail mix control. A large part of the reason for the demise of "The Traditional High Street" is precisely because they are divided up into tiny units, each owned by a different people, and there is no incentive to co-ordinate and co-operate to get the best overall use.

Homey In Chief making an idiot of himself by misquoting Adam Smith, yet again

Emailed in by Lola and Mombers, Allister Heath in The Telegraph:

An online sales tax would hit the poorest shoppers hardest

As so often is the case, it was Adam Smith who got it right, even though he was writing in 1776, long before anybody could possibly have imagined the rise of the digital economy...

The world might have changed dramatically in the intervening years but human nature and economic forces have not and big businesses still regularly call on the government to make their lives easier by passing laws designed to crush uppity upstarts. In the most egregious case of this behaviour for a long time, several leading retailers are calling for a new online sales tax to be slapped on those of us with the temerity to buy our shopping online; the rationale, boringly, is to "ensure a level playing field"...

All good stuff so far, but now he goes completely off piste...

What is most absurd about this whole saga is that retailers who advocate an online sales tax are fighting the wrong battle. While all corporate taxes eventually need to be reformed, there is nothing amiss with the way UK-based online giants such as Ocado or Asos are taxed – yet there is a major problem with how Tesco or John Lewis are being clobbered by Britain's unfair and antiquated business rates.

This is an onerous tax on commercial property which most members of the public are blissfully unaware of and which is accelerating the demise of the high street. The retailers' strategy is all wrong: had they focused on highlighting this and called for lower taxes on stores, they could have put themselves on the side of the consumer, to whom most taxes are largely passed on to anyway...

Because business rates are unrelated to profits, turnover or performance, they are the dumbest of all possible taxes, hurting struggling firms the hardest and pushing many into bankruptcy. Jessops and Comet were still shelling out even as the administrators were being called in.

And what did Adam Smith actually say about tax ..?

Bearing all these things in mind, there are two types of taxation which obtain Smith's recommendations: a tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).

On the subject of luxury consumables, he is adamant about the definition of 'luxury' and of 'necessary.' By his definition, a 'necessary' may vary from place to place and from time to time... Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax: "Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed ... Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution."

More deserving of praise is the tax on ground-rents: "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them."

Excise, customs, taxes on profits, were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: "To subject every private family to the odious visits and examination of the tax-gatherers ... would be altogether inconsistent with liberty."

The harshest condemnation of all, however, was for taxes upon labour: "In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable commodities."

Business Rates are of course the closest thing the UK has to a tax on the "ordinary rent of land" - they are paid out of the profits which would otherwise be appropriated by the landlord*.

Business Rates do not cost productive businesses (or the productive part of an owner-occupier business) one penny - they are not "passed on" to the tenant, and the business does not "pass on" one penny of it to the customer either. (For sure, Jessops and Comet were still being asked to pay Business Rates until the bitter end, but what finished them off was their landlords' refusal to drop the rents, rightly or wrongly).

We know this for a fact because the retail price of goods not consumed at point of use are much the same everywhere in the UK, even though Business Rates vary enormously, being next to nothing on a run down High Street and hundreds of pounds per square yard in prime shopping districts. Prices paid for goods and services consumed at point of use vary much more widely, so the gap between prices in London and other regions is much more marked, but that is the cause of high rents/Business Rates and not the result of them.

* Unfortunately, Business Rates are a second-best kind of Land Value Tax because they assessed on the total rental value including improvements rather than just the "site premium", but by and large and except in marginal cases, it comes to the same thing.

OECD, IMF on top form

From International Business Journal:

The Organization for Economic Co-operation and Development released a report on Tuesday calling on Germany to raise its property taxes dramatically and reduce taxes on labor. The group, whose membership is made up of 34 of the world's leading market economies, also made similar recommendations for Denmark, Norway and the UK over the past month.

For Germany, the organization recommended tripling its property taxes, while reducing its wage taxes and social security contributions, which currently make up 64 percent of total tax revenue, compared with the OECD average of 52 percent, according to the German language Immobilien Zeitung. Property taxes, meanwhile, amount to only 1 percent of total revenue collected, against an OECD average of 3 percent*. The group also called on Germany to reform its assessment mechanisms, as many properties are valued far below their true market worth...

The International Monetary Fund also made a similar recommendation to Norway this month...

The OECD has been a strong proponent recently of land value taxes, which date back to Adam Smith but were most vigorously promoted by 19th century economist Henry George. He promoted a land value tax—which is assessed on the unimproved value of underlying land, not penalizing intensive development like many property taxes today—as a replacement for all tariffs and levies, however the OECD has settled on a more moderate position, instead advocating a shift in emphasis away from other taxes and towards the land value tax.

Land value taxes can be tricky because of practical difficulties in estimating a plot's value, especially if it is a unique piece of land, or if land parcels like it do not change hands very often. Newer computer-assisted methods of land appraisal have made this job easier, though, and many countries around the world have adopted the tax.

The responses..?

The two groups' advice, however, was rebuffed by Norway's minister of finance, Sigbjorn Johnsen, who said at the press conference on Wednesday: "I have no plans to increase housing taxes."**

Denmark was subject to the same advice last month, with the Nordic Labour Journal reporting that the OECD advised the country to cut income taxes and increase property taxes. The Danish government plans to incorporate some of the OECD's recommendations into its 2012 tax reform, but a property tax hike will not be on the table. As the NLJ writes, "[t]his is because property taxes were ring-fenced in the coalition agreement covering this parliamentary term."

* In the UK, we have a quasi-Land Value Tax on commercial land and buildings (called 'Business Rates') which alone raises over 4% of total government revenues; we also have Council Tax on residential land and buildings, which is a mixture or Poll Tax and a modest property value tax, which raises another 3.5%.

** That'll be no surprise to Kj, I guess.

Killer Arguments Against LVT, Not (134)

I must admit, I blather on about the rental value of land being created by 'society' or 'the community'; the notion that if the government spends taxpayers' money wisely, it channels the gains in the direction of landowners; and the assumption that the value of your particular plot of land is largely influenced by what the occupants of surrounding plots do and not what you do, etc, but as a fair minded sort of chap, let's have a look at what the hard core Home-Owner-Ists have to say about it...

According to Channel 4 - who broadcast a lot of Kirstie Allsop's programmes, and she should know - if you want your 'investment to show capital growth', here is what you should look for when deciding where to buy:

1: What's The Area Like?
If you're worried about whether or not you'll feel at home with your new neighbours, fear not. Discovering everything, from your neighbours' incomes to what paper they read, is a cinch with a neighbourhood profile from www.upmystreet.com. Similar concerns about crime? This site will also provide the latest statistics.

2: High Street Hints
It's true that newly opened coffee shops, delicatessens and especially estate agents suggest an upward shift in an area. Unfortunately, shops tend to follow shoppers, so you may have missed your chance to get in early and snap up a bargain. However, it's still an encouraging sign that the times (and area) are changing.

3: Smartening Up
Many post-war town centres have become concrete wastelands, but planners are realising that braving the urban jungle is not what we want. Some quick enquiries at the local council may reveal if there are plans afoot to redevelop a town centre, which will make the area a more pleasant place to be.

4: Architectural Delights
Sought-after building styles - Victorian terraces or well-proportioned 1930s semis, for example - can push one area to the fore if surrounding neighbourhoods are less architecturally strong.

5: Mapping It Out
You're not the only refugee from gorgeous but unaffordable areas. Take solace in the 'ripple effect' - places on the boundaries of good areas often become desirable, so the best advice is to get out the map and look for likely candidates around your dream location.

6: Look To The Future
Thinking ahead is a must when buying, so don't just consider what you want from your house now - factor in what future buyers might want, too. Even if you don't have kids, your future buyers might, so try to pick an area with good schools. And it doesn't matter if you're a gym-dodger - potential purchasers may want one locally. No car? No matter - inadequate parking in an area will discourage car owners, so remember to bear this in mind too.

7: Home Improvements
Look out for any new developments and skips outside private homes, as they're signs of new blood moving in. Large disused buildings are also prime candidates for refurbishing into flats for professionals.

8: What Are Local Schools Like?
Check performance tables at the Department for Education and Skills and Ofsted inspection reports to see how schools are performing - marked improvements are a good sign. Also, see if there are universities in the area, giving you the option of future rental income, either for the whole property or just a room.

9: Quiet Life Or Night Spot?
An area that is peaceful during the day can turn into a swinging hotspot by night, so it's always a good idea to visit at different times, both during the day and week. Gangs of unsupervised kids hanging around are not a good sign of an area on the up.

10: Are Transport Links Decent?
New transport links signal investment, so investigate planned improvements on roads with the Highways Agency. To find out about existing travel links, contact National Rail Enquiries for trains, or Travel Line for buses.

Maybe I've missed something, but isn't that exactly what I've been saying all along?

It's just that I think this through to one logical conclusion - that it is better to tax community-created land values than to tax incomes; and the Homeys and Faux Libs draw the opposite conclusion - that skimming off the profits resulting from the efforts of others is a good way of making money. I don't think there is any disagreement on the actual facts, is there?

Random Adam Smith quote of the day

"Civil government, so far as it is instituted for the security of property, is, in reality, instituted for the defense of the rich against the poor, or of those who have property against those who have none at all."

The Wealth of Nations, 1776, from here.

Hayek on Land Value Tax

Much quoted by Faux Libs, e.g. here:

If the factual assumptions on which [Land Value Tax] is based were correct, i.e., if it were possible to distinguish clearly between the value of 'the permanent and indestructible powers of the soil,' on the one hand (a), and, on the other, the value due to the two different kinds of improvement - that due to communal efforts (b) and that due to the efforts of the individual owner (c) - the argument for its adoption would be very strong.

1. His objection appears to hinge solely on the valuation point, and not the underlying principle.

2. There is no reason to distinguish between (a) and (b); whether these values arise because of 'God' or 'nature' or 'communal efforts' or 'the good government of the state' (TM Adam Smith) is neither here nor there and nigh impossible to unpick*; the point is that we know the total market value of (a) + (b) + (c) because HM Land Registry records selling prices.

3. He appears to accept that part of land values relates to 'communal efforts' (b), i.e. factors far above and beyond the efforts of the land 'owner' himself (c), which is broadly speaking the value of the bricks and mortar. Legal concepts aside, if value arises from 'communal efforts', is it not fair to say that in economic terms the value belongs to 'the community'?

4. The value of (c), the actual bricks and mortar is easy to establish to within a tolerable margin of error. So to arrive at (a) + (b), all we need to do is take the recorded selling price for a 'property' (i.e. land + buildings); deduct the bricks and mortar value; and divide the result by the plot size, giving us a figure for the bare land/location value per square yard. To give a more reliable figure, we can then take an average of these values for all sales in the last five or ten years in each area (such as a postcode sector or a council ward). As a final check, we can do a map showing these values and will observe that they will tend to form 'contour lines' around town centres and so on.

5. While the absolute values have gone up hugely over the last fifteen years, it is relative values that are important and not absolute ones, i.e. town centres will always be ten times as much as suburbs; and suburbs will always be fifty or a hundred times as much as farm land; or London will always be three times as much as Manchester, and Manchester will always be three times as much as Dundee (or whatever). The land value tax per square yard of land would then be set proportional to the values arrived at in 4. above.

A tax on land values would act like a much higher interest rate and would keep absolute buying and selling prices much lower and hence more stable, and in future rental values, capital selling values and the tax in each area would move very much in line. From there on in, it's just a question of keeping an eye out for areas where than land and buildings are sold for less than the value of the bricks and mortar and reducing the tax/sq yard a bit in these areas (down to zero if necessary); and if capital selling values in some areas is still noticeably higher than in surrounding areas, the tax/sq yard is increased a bit.

6. Therefore the "factual assumptions" are correct, therefore, "the arguments for its adoption [are] very strong" and from the Austrian school point of view, such a tax would tend to keep land prices low and stable and hence significantly dampen land price and credit bubbles, which are two sides of the same coin.

7. What's not to like?
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* Think about houses in Village A near a beautiful beach. The houses owe part of their value to the beach. Is that beach beautiful because of 'God' or 'Nature' (or do we humans merely perceive it as beautiful because of a deep collective memory of pre-Stone Age times when humans lived near beaches and seldom ventured inland, or at least that's way Ray Mears said)? And does the beach not owe its beauty partly to the fact that the government would not allow e.g. oil drilling to take place half a mile offshore?

And what if Village B a few miles up the coast has a similar beach, but also has a railway station connecting directly to a large urban centre - where are the houses worth more, in A or B? Perhaps residential properties are worth more in A because it's more 'exclusive'; but hotels are worth more in B because it's easier for holidaymakers to get to. Is it the railway station or the beach that gives the hotels in B their extra value? Is it the lack of railway station or the beach that gives houses their extra value in B?

Is the railway itself to be classified as 'communal effort' or 'good government'? Is there a difference? etc.

Adam Smith & subsidies for broadband

Anti-Citizen One quoted from Adam Smith recently:

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land

... and asked Was Adam Smith a Georgist? (as I replied in the comments, on the facts, no, he wasn't). Paul Lockett, also in the comments, reproduces Adam Smith's famous quote explaining why Land Value Tax is the least-bad and fairest tax.

But let's move on to today. The government, in its cack-handed fashion has decided it should subsidise the expansion of the broadband network by slapping a £6 annual tax on every landline, which is rather bizarre.

We know that the revenues-per-household that a broadband provider can charge are fairly fixed, but the cost per household of digging up the pavements and setting up all the boxes are inversely proportional to the population density of the area being cabled. So for a broadband provider, the calculation is simple - they just cable the most densely populated areas and ignore the rural areas, which is exactly what has happened so far.

In the more densely populated areas, the provider makes super-profits, because it can charge £20 a month per user for an amortised cost of £10; in outer urban areas, the provider makes no super-profit because the amortised cost is equal to the revenues; and there's no point in digging up roads in areas where there is the odd farmhouse or hamlet miles apart.

And who owns the pavements? It's the local council on behalf of society in general. So the local council in a densely populated area is perfectly within its rights to charge the provider £9 per household for the privilege of digging up pavements - the provider still makes a profit, and households still get broadband - everybody's happy. Whether you see this as the local council charging 'rent' for the use of pavements or collecting 'tax' on the value of its pavements is moot - rents and taxes are much the same thing, really.

A council in an outer urban area can't charge anything of course, but hey, at least those areas get broadband.

Before we move on to very-outer urban areas, we have to consider the consumer surplus - we know that people, on the whole, will pay slightly more to live in a home that has broadband than in one that doesn't. This consumer surplus accrues to the landlord or the home-owner (especially when he comes to sell) - to paraphrase the opening quote, instead of Adam Smith's labourer paying the landowner a licence to gather fruit, the tenant is paying the landlord a licence to be able to access broadband.

So there can't be much harm in increasing the Council Tax (the nearest thing we have to Land Value Tax*) slightly in areas with broadband. The broadband access increases the land value and LVT depresses it in equal and opposite measure (and as we know, such a tax is borne by the landlord/vendor and cannot be passed on to the tenant/purchaser).

Finally, we get to very-outer urban and not-so-sparsely populated rural areas. For the broadband provider, there is no profit to be made in digging up the pavements and laying the cables; but on the other hand, the local council (who controls the pavements and sets Council Tax) knows that it would be able to charge an extra £x per month in Council Tax per home if they had broadband access.

So surely, the ideal source of tax to subsidise the expansion of the broadband network would of course be the extra Council Tax that the local council in the very-outer urban areas etc. could collect? That way there are no windfall gains and losses and there is the closest possible match between those who pay and those who benefit - unlike a random tax on telephone landlines, size 11 shoes or fish'n'chip suppers or anything else.

Or have I missed something?

* Actually, Business Rates are even more like LVT - as broadband access increases rental values, this will flow through into slightly higher valuations next time around, but this is a very slow process.