<p>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 (<a href="https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_1738-2" rel="nofollow noreferrer">Alchian 2017)</a>:</p>
<blockquote>
<p>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.</p>
</blockquote>
<p>Hence rent can have various meanings depending on the context. Only the last definition of rent that is:</p>
<blockquote>
<p>‘Monopoly rent’ is paid to producers in markets that are artificially restricted; it may be dissipated by ‘rent seekers’ who compete for monopoly status.</p>
</blockquote>
<p>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).</p>
<p>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 &amp; Peitz Industrial organization: markets and strategies). However, oligopolistic profit would not be considered monopoly rent - even if firms have market power.</p>
<p>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.</p>

CC BY-SA 4.0
2020-11-17T12:58:24.920Z
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.
sba222
CC BY-SA 4.0
2020-11-17T13:03:46.673Z
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.  

https://economics.stackexchange.com/questions/40897/what-is-the-difference-in-outcome-between-supply-being-fixed-by-nature-and-suppl
sba222
CC BY-SA 4.0
2020-11-17T13:04:05.297Z
Schwerhoff et al consider market power per se a source of rent:
https://onlinelibrary.wiley.com/doi/full/10.1111/joes.12340
sba222
CC BY-SA 4.0
2020-11-17T13:05:14.523Z
@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.
1muflon1
CC BY-SA 4.0
2020-11-17T13:16:20.387Z
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.
sba222
CC BY-SA 4.0
2020-11-17T13:20:49.307Z
@Steve222 it is not a moot point because monopolistic competition is also considered to be form of competition in IO literature. Also, this really does not matter. Nothing in my answer here says that land market should be perfectly competitive. Point of my answer here is that **rent $\neq$ market power**  in general only under specific definitions- which is btw what also the source you linked confirms since the source there talks about the fact that rent has different meaning and there are different types of rent. The new question does not ask if the market for land is considered competitive
1muflon1
CC BY-SA 4.0
2020-11-17T14:01:10.593Z
So your answer would be that the urban land market is *not* competitive? But the source of rent in the urban land market is not primarily lack of competition but due to the fact that returns to factor land are called "rent" by definition?  (My new question looks at the latter issue in detail.)
sba222
CC BY-SA 4.0
2020-11-17T14:07:58.630Z
@Steve222 yes although I would always recommend adding *perfectly* competitive to avoid confusion - again in some subfields of economics competitive has wider meaning. Also note, in my answer I do not try to prove that land markets would be competitive - the point is rather that return to land is called rent whether they are competitive or not - so the answer is that return to land will always be rent. I personally dont believe on average land markets are *perfectly* competitive but even if they are not its not *guaranteed* there is market power and that there are economic rents.
1muflon1
CC BY-SA 4.0
2020-11-16T10:48:56.577Z
2020-11-16T10:48:56.577Z
1muflon1
<p>We could argue about some of your assumptions, but that would lead to unnecessary opinion-based discussion.</p>
<p>In a (perfectly) competitive market everyone is a price taker. This is not the case here. Therefore, it is not a perfectly competitive market.</p>
<p>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 &quot;perfect vacuum&quot; 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 <a href="https://en.wikipedia.org/wiki/Perfect_competition" rel="nofollow noreferrer">wikipedia page.</a> There are many reasons why a market may not be competitive and in reality almost always most of them apply.</p>

CC BY-SA 4.0
2020-11-17T13:05:05.710Z
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.
https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/nationalbalancesheet/2018
sba222
CC BY-SA 4.0
2020-11-17T13:29:04.283Z
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.
Bayesian
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2020-11-17T13:34:58.800Z
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.
Bayesian
CC BY-SA 4.0
2020-11-17T13:53:37.797Z
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?
sba222
CC BY-SA 4.0
2020-11-17T13:58:53.383Z
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.
Bayesian
CC BY-SA 4.0
2020-11-17T14:06:39.067Z
Are you implying that it may decrease welfare to increase competition in the urban land market? I mean _fostering_ competition.
sba222
CC BY-SA 4.0
2020-11-17T14:24:39.150Z
Yes, for instance, if a firm develops a new drug it makes sense to grant the firm monopoly rights for some time. If the drug would be traded on a competitive market, the profits may not cover the development costs. Hence, the drug would not be developed in the first place although the world with the drug welfare dominates the world without the drug.
Bayesian
CC BY-SA 4.0
2020-11-17T17:36:30.177Z
There is no doubt that what you say makes sense for produced factor capital. But it does not apply to non-produced factor land. Locations are not produced so they don't require patents or incentives to internalise rents. In fact, for welfare purposes it does not matter who owns urban land (locations); supply and demand will be the same.
sba222
CC BY-SA 4.0
2020-11-17T17:51:41.617Z
This was just an example. These lengthy discussions seem to go nowhere. I don't see the point here. This is a completely new question now.
The answer to your question is: No, the market is not (perfectly) competitive, but depending on the model, it can be a good approximation or a reasonable tool to sustain tractability.
Bayesian
CC BY-SA 4.0
2020-11-16T10:45:45.443Z
2020-11-16T10:45:45.443Z
Bayesian
<p>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).</p>
<p>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?</p>

CC BY-SA 4.0
2020-11-16T10:35:32.370Z
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: https://en.wikipedia.org/wiki/Perfect_competition Would you say that these coditions are satisfied in many (any?) real-world markets?
Bayesian
<monopoly><competition><land>
Are urban land (location) markets considered competitive even though the market price does not equal marginal cost (zero)?
sba222
# Are urban land (location) markets considered competitive even though the market price does not equal marginal cost (zero)?

(Asked by: username_0 on 2020-11-16)

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?

**Tags:** monopoly, competition, land

> **Comments:**
> **username_1**: 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: https://en.wikipedia.org/wiki/Perfect_competition Would you say that these coditions are satisfied in many (any?) real-world markets?  

---

## 2 answers

### Answer by username_2 on 2020-11-16. Score: 3

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)](https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_1738-2):

> 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.

> **Comments:**
> **username_0**: 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.  
> **username_0**: 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.    https://economics.stackexchange.com/questions/40897/what-is-the-difference-in-outcome-between-supply-being-fixed-by-nature-and-suppl  
> **username_0**: Schwerhoff et al consider market power per se a source of rent: https://onlinelibrary.wiley.com/doi/full/10.1111/joes.12340  
> **username_2**: @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.  
> **username_0**: 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.  
> **username_2**: @Steve222 it is not a moot point because monopolistic competition is also considered to be form of competition in IO literature. Also, this really does not matter. Nothing in my answer here says that land market should be perfectly competitive. Point of my answer here is that **rent $\neq$ market power**  in general only under specific definitions- which is btw what also the source you linked confirms since the source there talks about the fact that rent has different meaning and there are different types of rent. The new question does not ask if the market for land is considered competitive  
> **username_0**: So your answer would be that the urban land market is *not* competitive? But the source of rent in the urban land market is not primarily lack of competition but due to the fact that returns to factor land are called "rent" by definition?  (My new question looks at the latter issue in detail.)  
> **username_2**: @Steve222 yes although I would always recommend adding *perfectly* competitive to avoid confusion - again in some subfields of economics competitive has wider meaning. Also note, in my answer I do not try to prove that land markets would be competitive - the point is rather that return to land is called rent whether they are competitive or not - so the answer is that return to land will always be rent. I personally dont believe on average land markets are *perfectly* competitive but even if they are not its not *guaranteed* there is market power and that there are economic rents.  

---

### Answer by username_1 on 2020-11-16. Score: 2

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.](https://en.wikipedia.org/wiki/Perfect_competition) There are many reasons why a market may not be competitive and in reality almost always most of them apply.

> **Comments:**
> **username_0**: 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. https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/nationalbalancesheet/2018  
> **username_1**: 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.  
> **username_1**: 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.  
> **username_0**: 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?  
> **username_1**: 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.  
> **username_0**: Are you implying that it may decrease welfare to increase competition in the urban land market? I mean _fostering_ competition.  
> **username_1**: Yes, for instance, if a firm develops a new drug it makes sense to grant the firm monopoly rights for some time. If the drug would be traded on a competitive market, the profits may not cover the development costs. Hence, the drug would not be developed in the first place although the world with the drug welfare dominates the world without the drug.  
> **username_0**: There is no doubt that what you say makes sense for produced factor capital. But it does not apply to non-produced factor land. Locations are not produced so they don't require patents or incentives to internalise rents. In fact, for welfare purposes it does not matter who owns urban land (locations); supply and demand will be the same.  
> **username_1**: This was just an example. These lengthy discussions seem to go nowhere. I don't see the point here. This is a completely new question now. The answer to your question is: No, the market is not (perfectly) competitive, but depending on the model, it can be a good approximation or a reasonable tool to sustain tractability.  

---

