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On Monopoly Rent
Author(s): Alan W. Evans
Source: Land Economics , Feb., 1991, Vol. 67, No. 1 (Feb., 1991), pp. 1-14
Published by: University of Wisconsin Press

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 On Monopoly Rent

Alan W. Evans

As for monopoly rent, no-one, to our knowl- it is still the author's faint hope that this
edge, has ever successfully stated the theory paper may still assist the progress of eco-
accurately enough-and the statement of the nomic thought.
theory need not be that precise-for the theory Because the theory of monopoly rent has
of monopoly rent to be regarded as a genuine never been properly formalized, the con-
scientific doctrine. Instead the idea is met in
comments scattered in the works of different cept remains shadowy and amorphous be-
authors. (Samsonoff 1912, 151-52, translation) cause different authors appear to have
meant different things by it. Analysis of the
More than three quarters of a century writings of the various authors suggests
later the situation has changed little, if at three possible ways in which the term is
all; the concept of monopoly rent is still met intended to be understood. The first we call
in brief comments scattered in the works of ''Class Monopoly,'' after the usage by Har-
many different authors. Moreover a thor- vey (1974). Here the class of land owners,
ough study of the literature suggests that by definition, own all the land and the rent
there is little continuity and therefore lit- of the land is monopoly rent. This usage
tle sense of cumulative progress. Every seems to be frequent in the writings of the
twenty years or so the idea of monopoly classical economists in the nineteenth cen-
rent surfaces and is discussed by one or two tury. The second we call "Site Monopoly,"
authors, but these discussions are unrelated after the usage in a recent study by Damp-
to earlier work of which the authors seem fling (1985). This is based upon the idea that
mostly to be unaware. the site owned by a land owner can be
The aims of this paper are therefore two- distinguished from all others. It follows that
fold. The first is to provide a survey of the the owner monopolizes that site and de-
different ways in which economists have rives a monopoly rent from it. In each of
conceived and treated the idea of monopoly these cases it seems clear that monopoly
rent, and so to bring together and system- rent is the same as what is usually called
atize the '' scattered opinions'' to which differential rent. Moreover land owners are
Samsonoff referred so long ago. The sec- not thought to behave "monopolistically"
ond is to present the kind of accurate and in the sense that they remain price takers
precise statement of the theory of monop- rather than price makers and are not alleged
oly rent for which Samsonoff asked in 1912, to restrict the use of land in order to keep
one which would allow monopoly rent to be rents above the free market price.
regarded as a ''genuine scientific doctrine.'' The third usage of the concept originates
It must be admitted, however, that the with Marx and therefore could be described
thorough study of the literature mentioned as "Marxian Monopoly Rent." Marx dis-
above leaves one with a pessimistic view of tinguishes Monopoly Rent from his other
progress in economic science, with respect two rent categories-Differential Rent and
to monopoly rent at least. Given that the Absolute Rent-and uses it to describe a
concept seems to be rediscovered every situation in which the product of an area of
twenty or thirty years, and that the discov-
erers seem to refer very little, if at all, to
previous literature, there seems no reason
why the cycle of discovery and oblivion Professor of Environmental Economics, Univer-
sity of Reading, England.
should not go on for another two hundred I am indebted to the Nuffield Foundation for fi-
years. Despite the fact that the literature nancial support, and to two anonymous referees for
gives no grounds for any such expectation, helpful comments on an earlier draft.

Land Economics• February 1991 • 67(1): 1-14

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2 Land Economics February 1991

land is specific to that land, for example a improvement of the land, or to what he can af-
particular wine, and where the producers ford to take; but to what the farmer can afford
face a downward sloping demand curve for to give. (Smith (1776) 1910, 13 I)
that product. Land owners can then act mo-
nopolistically by fixing rents and limiting The idea occurs again a few years later
the amount of wine that is produced, so en- in the work of J. B. Say, who remarks in
suring higher rents. his Traite d' Economie Politique that
A referee has argued that it is difficult to
distinguish theoretically between monopoly the owners of land, at least in countries which
rents and any other monopoly profit, and have been settled and cultivated for a long time,
therefore that I am ''using monopoly in exert a kind of monopoly over the farmers. Their
demand for their share of the product, that is the
general and calling it rent in the presence share due to the land, can be extended without
of land." There is an element of truth in limit, but the amount which they get can only
this suggestion. Nevertheless it seems to be extended up to a certain point. (Say 1861,
me that if any rents can truly be described 407)
as monopoly rents then it must be those
which occur when the profits attributable And again, emphasized with block capi-
to monopolistic behavior are realized in the tals, it appears in the work of Nassau Se-
form of rents which are higher than would nior where he refers to the class of monopo-
exist if there were no monopolistic be- lies which
havior.
A problem with the kind of survey and exists where production must be assisted by nat-
systematization which is attempted in this ural agents, limited in number, and varying in
paper, as a referee has also pointed out, is power, and repaying with less and less relative
that the concept of monopoly rent is used assistance every increase in the amount of the
by the various authors within the context of labour and absistence bestowed on them. It is
under these circumstances that the greater part
their several different scientific paradigms. of the raw produce, whatever it be, which is the
The process of survey necessarily takes the staple food of the inhabitants in every Country,
concept out of these different contexts and potatoes in Ireland, wheat in England, or rice in
the process of systematization fits them all India, is produced. It is, in fact, THE GREAT
within one particular scientific paradigm, in MONOPOLY OF LAND. (Senior (1872) 1938,
this case the Procrustean bed of orthodox 105)
static (neoclassical) microeconomic analy-
sis. Necessarily this may fail to do com- The classical economists' reiteration of
plete justice to the original authors' ideas, the idea that the rent of land arises from a
but one hopes that this is compensated by monopoly seems to based on the view that
a gain in understanding. the price of a good should be equal to its
cost of production. Differences might occur
I. CLASS MONOPOLY in the short run but in the longer run this
would be true, except, of course, where a
The idea that the return to land as a monopolist was able to charge a higher
whole is a return to monopoly seems to price through restricting the supply of the
occur at various times in the writings of good. In the case ofland the cost of produc-
the classical economists. It appears, for ex- tion is zero, but still a rent is charged. It
ample, in The Wealth of Nations early in seemed to follow, even if only by analogy,
Adam Smith's long, discursive, chapter that rent was therefore a result of mo-
"On Rent." nopoly.
Smith, for example, notes that "the
The rent of land, therefore, considered as the landlord demands a rent even for unim-
price paid for the use of the land, is naturally a proved land" and that although the amount
monopoly price. It is not at all proportioned to of the rent may be increased because im-
what the landlord may have laid out upon the provements have been made, these im-

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67(1) Evans: Monopoly Rent 3

provements may be made by either the is the source of the increase of rent. (Cardozo
landlord or the tenant. [1826) 1960, 25)

When the lease comes to be renewed, however, With the advent of neoclassical economics,
the landlord commonly demands the same aug- with its generalization of the theory of price
mentation of rent as if they had all been made and distribution and its lack of differentia-
by [himself]. (Smith [1776) 1910, 131) tion in the treatment of the different factors
of production, the view that the rent of all
His justification for the view that rent "is land is a return to monopoly virtually disap-
naturally a monopoly price" is then that pears. Ironically what would appear to
rent, as stated in the quotation above, is not have killed off the idea is Marshall's gener-
proportional to any capital that the landlord alization of the concept of land rent in intro-
may have invested in the land, but is deter- ducing the term economic rent to describe
mined by what the farmer can afford to pay. a payment over and above its transfer earn-
In the middle of the nineteenth century ings to any factor, not merely land. For this
John Stuart Mill seems to be making vir- recognizes what the classical economists
tually the same point, though at greater seemed also to recognize with their use of
length. the term monopoly. They were importing
into the theory of land rent a term which
It is at once evident that rent is the effect of they thought threw light on the peculiar po-
a monopoly; though the monopoly is a natural sition of land, namely that it would yield
one . . . . The reason why landowners are able its services even if no payment for those
to require rent for their land, is that it is a com-
modity which many want, and which no one can
services were made.
obtain but from them .... Marshall, on the other hand, took the
A thing which is limited in quantity, even term "rent," as originally applied to land
though its possessors do not act in concert, is and property, and applied it, as "economic
still a monopolized article. But even when mo- rent" to all situations in which the reward
nopolized, a thing which is the gift of nature, paid, whether for labor or any other factor
and requires no labour or outlay as the condition of production, was higher than necessary
of its existence, will, if there be competition to induce the factor to provide its services.
among the holders of it, command a price, only With this change in terminology, dare one
if it exists in less quantity than the demand. (Mill say with this advance in economic under-
[1871) 1924, 423)
standing, the use of the term monopoly as
referring to class monopoly virtually disap-
The classical economists could perceive pears from the literature.
that land would supply its services whether Two late appearances should perhaps be
or not a rent was paid and that the "cost of mentioned, however. Hobson (1891) ac-
production" ofland was zero. The payment cepts the Ricardian analysis of differential
of rent seemed to them therefore to be simi- rent as it applies to land with but a single
lar in character to the payment to a monop- use, such as wheat, and hence agrees
olist of a price which exceeded the "true"
cost of production or price of a monopo-
lized good. rent could not figure in the price of wheat. But
where there are many uses for land, and all land
This line of thought is clearly evident in is not equally suited to each use, it will be evi-
the work of the early American economist dent that the worst land employed for a particu-
Jacob Newton Cardozo. lar use may be land paying a rent. The simplest
case is of course that of town lands, where the
How then, it may be asked, can that increase in land at the margin of employment for town pur-
the price of raw produce which obviously goes poses is not no-rent land, but land commanding
to augment rent be accounted for? The excess high agricultural rent. This rent paid at the mar-
of the price of the products of the land caused gin of employment enters into town prices, and
by monopoly, above that price for which they forms an element of monopoly in the "expenses
might be obtained if the monopoly did not exist, of production" of manufactured goods . . . .

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4 Land Economics February 1991

What applies to town uses applies also the ag- Harvey and Chatterjee's economic analysis
ricultural uses of land. (Hobson 1891, 14) was based on the premise of competitive
markets, and class monopoly rent in their
These "monopoly rents," he argues, "raise work appeared to be conceptually similar
the 'expenses of production' above the to Marshallian economic rent (Evans 1975;
limit indicated by the natural 'cost of pro- Boddy 1975). But then, as the analysis in
duction' " (p. 13). this section shows, this was to have been
Another, but otherwise dissimilar, view expected, since the concept of monopoly
that land rent is partially a monopoly rent rent in classical economics was an attempt
appears in Charles Gide's Principles of Po- to deal with the same economic problem as
litical Economy, first published in the nine- the concept of economic rent in Marshall-
teenth century but in its seventh edition in ian economics.
1924. In discussing the theory of rent he
agrees that Ricardian theory can explain II. SITE MONOPOLY
differences in the rents of different sites be-
cause of their differences in fertility, but If class monopoly depends upon the idea
goes on to say that that landowners have, by definition, a
monopoly of land, site monopoly depends
it will be seen that on this theory there are only upon the idea that the owner of a site has
differential rents, which means that there would a monopoly with respect to that site be-
be no rent at all if all pieces of land were of cause it can be distinguished, if only by a
the same quality. Now that is where Ricardo's map reference, from all other sites. The
theory seems to be, if not incorrect, yet at any basis of this concept of monopoly rent is
rate incomplete as an explanation of rent. . . .
Rent would undoubtedly remain . . . , although stated very clearly by Bye (1940). "It is evi-
by hypothesis, it would be the same for every dent that two pieces of land cannot occupy
piece of land. It must, therefore, have some the same fixed space, and that land, unlike
other basis that is absolute and not merely rela- other commodities, must be used where it
tive, which leads us back to the explanation that is found. In this sense no plot of land can
bases it upon the fact that land is a monopoly. be duplicated, and its owner might be said
(Gide 1924, 374) to possess a monopoly" (Bye 1940, 11).
If the idea of class monopoly rent seems
The idea that all rent is due to a monop- to have been a feature of classical econom-
oly of land-that landowners "possess a ics and current in the period between Smith
class monopoly over land use" (Harvey and Marshall, the idea of site monopoly
1973, 179)-returns to the literature in rent seems to be primarily a twentieth cen-
work by the geographer David Harvey in tury concept, with interest in the concept
the 1970s (Harvey 1973, 1974; Harvey and being initiated by some comments by
Chatterjee 1974). This is completely appo- Chamberlin in The Theory of Monopolistic
site since Harvey was consciously seeking Competition (1933). Despite, or perhaps be-
''to turn to the earthy richness of classical cause, these comments were little more
political economy,'' taking the view that than asides they seem to have been the
"the neo-classical achievement . . . suc- stimulus for a number of contributions-by
ceeds in burying some of the more relevant Ise (1940), Bye (1940), Anderson (1941),
technical and ethical issues which attach to and Spengler (1946); and, later, an ex-
rent as it functions in the urban land mar- change between Wendt (1957) and Ratcliffe
ket" (1973, 178). Apart from an alteration (1957).
in terminology, however, it is unclear what Chamberlin stated that ''the rent for any
is gained by this particular change. Cer- urban site is an expression of the value of
tainly, as this author has argued elsewhere, the monopoly privilege of providing retail
it does not seem to add to our understand- services at that particular location" (1933,
ing of the land and property market, since 268). He limited the application of the con-

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67(1) Evans: Monopoly Rent 5

cept to urban sites, and urban retail sites in afforded by one site as compared to an-
particular. Some justification for this limita- other, is rent, and is put into the hands of
tion is provided by Bye. Farm lands landlords by the competition of entrepre-
neurs for the best opportunities" (1933,
conform to the assumption of pure competition, 269). If the urban site rents are determined
whereas [retail merchandising sites] are said to in this manner then they are identical with
display monopoly characteristics. The basis of and the same as differential rents, and no
dissimilarity lies in the effect of location upon extra monopoly rent exists on top of the
the product. Differences in location of various basic differential rent.
farms do not distinguish their products in the As Anderson notes, "the term 'monop-
market. Buyers have no preference for a near
over a distant seller. The varying location of re- oly' has not had a consistent usage. In some
tail stores, on the other hand, serve to differenti- instances it has been used to imply a posi-
ate their products spatially, each affording a tion of complete or exclusive control over
convenience for a given group of buyers. Such something; in others it has been used to
differentiation constitutes a monopoly element designate a 'power to control price' "
which is the primary factor in the determination (1941, 341). What seems to happen is that
of retail merchandising site rent. (Bye 1940, the arguments shift from asserting the first
11-12) to implying the second. The argument is
succinctly stated by Ise:
In practice the Chamberlinian distinction
between urban retail sites, to which cus-
tomers travel to buy products, and farm Yet our conclusion as to the monopolistic char-
land, from which the products are trans- acter of urban rent will depend on our concep-
tion of the fundamental characteristics of mo-
ported to the customers, seems difficult to nopoly. If we think of monopoly as control over
sustain, and this quite apart from the no- supply, the urban land owner is a monopolist,
man' s-land to which urban non-retailing to the extent that his site differs from other sites;
sites seem to be assigned. Differences in but so then is the owner of almost every product
location matter to farms and farmers just of nature, for nature emphasises heterogene-
as they matter to shops and shop-keepers. ity. . . . If we adopt this concept of monopoly,
There is a well-developed theory of rural every farm owner is a monopolist, for every
land use dating back to Von Thunen, even farm differs from every other in some re-
to Ricardo, backed by empirical evidence spects .... But we may say, further, that every
(see, for example, Chisholm 1968), to sug- man, woman, or child, regardless of abilities,
gest that farms at different locations pay differs from every other, and is therefore also a
monopolist ....
different rents just as shops at different lo- Such a concept of monopoly has no great so-
cations pay different rents. Of course the cial significance, and does not suggest the anti-
differences in rent between farms which are social character of monopoly. We may well re-
near each other are likely to be smaller than gret that there [is] not ... an unlimited supply
the differences in rent between shops which of the best agricultural land and the most fa-
are near each other but the differences exist vourably located urban sites; but nature and
just the same. not ... "monopolists" is responsible for the
What Chamberlin implies are rents at- limitation.
tributable to monopoly are, therefore, rents If, on the other hand, we assume that the
which elsewhere in the literature are usu- fundamental characteristic-or shall we say ef-
fect?-of monopoly is a restriction of produc-
ally described as differential rents. The ref- tion and an increase in price to the consumer ...
erence to monopoly merely creates confu- then urban rent has few of the earmarks of mo-
sion. Moreover Chamberlin makes clear in nopoly. (lse 1940, 43)
a later comment that he is in practice talk-
ing about differential rents. "The differen-
tial remaining, which is due to the superi- This confusion in the use of the term
ority of the profit making opportunities monopoly rent still occurs. Very recently

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6 Land Economics February 1991

Dampfling (1985) attributed differences this point of view attractive. Those renting
usually ascribed to differential rents to mo- out or selling property do not appear to be
nopoly rents. price takers. They have some of the appear-
ance of price makers. They set prices and
The production costs of two dwellings may be are prepared to wait for renters or buyers to
absolutely identical, but if one is at a pretty loca- accept the prices offered, even if this means
tion, the other at a less favoured site, the rents that in the mean time the property lies
corresponding to the sites will be very differ-
ent .... The rents of the dwellings cannot differ empty. But the property market is an im-
because their production costs differ, but be- perfect market, not because of endemic
cause of a monopoly price, which defines the monopoly, but for other reasons. Property
level of the site monopoly rent. (Dampfling 1985, is heterogeneous and the property market
96) is characterized by a lack of information. A
seller of property sets a price and adver-
In fact, of course, the differences between tises it. Buyers search through buying op-
the rents at the two locations occur because portunities. Negotiation takes place before
of competition between buyers for the bet- the sale or lease of a property to agree upon
ter site and so would be usually described a price. The landlord therefore appears, to
as differential rents elsewhere in the litera- some extent at least, to be determining
ture. As has been said, although the owner prices. Nevertheless, just as with the labor
of a site may have a monopoly over that market where similar imperfections result
site, this does not mean that the owner ob- in different wages being paid by different
tains a monopoly rent over and above dif- employers for equal work, the landlord is
ferential rent, and the use of the term to not a monopolist because an asking price
describe what is in practice the ability to is set initially, any more than a potential
obtain differential rent is misleading. employee is a monopolist because he or she
Why then does the use of the term "mo- has a reservation wage below which work
nopoly rent" persist? The most important will not be accepted.
reason, in my view, must be that there is
no standard price for a piece of land. The III. MARXIAN MONOPOLY RENT
prices of different sites are certainly related
as buyers assess the additional benefits or Marx, as one might expect, as a classical
additional costs of one site rather than an- economist if for no other reason, attributes
other. For example, the price of a piece all rents to monopoly-"Landed property
of land may be determined by, say, the presupposes that certain persons enjoy the
amount that buyers are willing to pay for monopoly of disposing of particular por-
otherwise similar sites a little bit further tions of the globe as exclusive spheres of
from or nearer to a market place, but still their private will to the exclusion of all oth-
the price for this particular site is different ers" (Marx [1894] 1981, 752). But unlike
from the prices of these other sites, being the earlier classical economists he distin-
higher than the one and lower than the guishes three types of rent-differential
other. It may be that these differences in rent, absolute rent, and monopoly rent (see
price are entirely explained by differences Harvey 1973, 179-82). The first of these
in transport costs, but still the price for this arises from the differences between loca-
apparently unique site is itself apparently tions and pieces of land and is as usually
unique. So even if price differences can be understood. The second of these is not
explained by the theories based on the orig- dealt with here, but arises because, on
inal work of Von Thunen and Ricardo, still, Marx's view, landlords would not let out
to some, it appears reasonable to attribute their land below a certain minimum which
these rent differences to monopoly, in some he called absolute rent (see Evans 1988). It
sense, rather than to differential rents de- is the third of these which concerns us here,
termined by a competitive process. monopoly rents being the surplus over the
There is a second reason which makes other two arising from "an independent

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67(1) Evans: Monopoly Rent 7

monopoly price for the products of the land differential (and absolute) rents, some land-
itself.'' Marx deals with monopoly rent vir- lords may also obtain monopoly rents. This
tually in a single paragraph in Capital. situation may arise if the product or service
derived from a few sites may only be ob-
It is necessary to distinguish whether the rent tained from those sites and so the owner of
flows from an independent monopoly price for the site has a monopoly over the provision
the products or the land itself, or whether the of the product or service by virtue of his
products are sold at a monopoly price because ownership of the site. Furthermore if the
there is a rent .... A vineyard bears a monopoly landlord lets the site to a tenant, it follows
price if it produces wine which is of quite excep-
tional quality but can be produced only in a rela- that the tenant acquires a monopoly of the
tively small quantity ... [The] surplus profit, sale of the product, and so the landlord can
which in this case flows from a monopoly price, ask a higher rent than he otherwise could,
is transformed into rent and accrues in this form that is a monopoly rent can be obtained
to the landowner by virtue of his title to the over and above the normal differential rent.
portion of the earth endowed with these special Moreover if the land is let to several ten-
properties. Here, therefore, the monopoly price ants, the landlord can impose conditions on
creates the rent. Conversely the rent would cre- their use of their sites to ensure that, al-
ate the monopoly price if com were sold not though the rent of any single tenant may be
only above its price of production but also above lower than it otherwise might be, the total
its value, as a result of the barrier that landed
property opposes against the rent-free invest- rent derived from the land is higher because
ment of capital on untilled land. (Marx, [1894) of his monopolistic behavior.
1981, 910) In the next section the standard, partial
equilibrium theory of monopoly is used to
Here Marx distinguishes monopoly rent show that monopoly rents may exist. The
(which flows from an independent monop- extent to which they actually do exist then
oly price for the products or the land itself) becomes a question to be decided on the
from absolute rent, to which the last sen- basis of empirical evidence. It is suggested
tence of the quotation refers. that there is evidence that they do exist,
The idea that monopoly rents may occur although their importance is likely to be
in certain situations, in particular in the small. It is recognized that some may object
case of vineyards, also appears in Daniel to the use of neoclassical methods for the
Buchanan's classic article analyzing and analysis of a concept which is admitted to
rewriting the Ricardian and marginalist appear first in Marxian economics. Per-
traditions in the theory of land rent. In a haps, for them, the concept should be re-
footnote he comments that "there are ex- garded as being reinterpreted within the
ceptional cases in which land is so pecu- context of the neoclassical paradigm. There
liarly fitted by nature for one product, such seems no reason why the paradigms should
as grapes, that it has no practical alterna- be totally separate; dialogue should be to
tive .... In such a case an agent may be the benefit of both.
forced to accept a very small return (for
instance, grape land in a world gone prohi- IV. THE ECONOMIC THEORY OF
bition) or it may get very much, a monopoly MONOPOLY RENT
rent" (Buchanan [1929] 1957, 634).
In interpreting the concept of monopoly
Now whereas the previous two concepts rent we shall assume initially that a product
of monopoly rent that have been discussed is produced from an area of ground owned
do not seem very useful, the ideas they rep- by a single landowner (or, of course, a car-
resent being subsumed by the concepts of tel). We assume, for ease of exposition,
economic rent and differential rent, this that it is a vineyard, that Chateau Alpha
concept of monopoly rent does represent wine can be produced from the vines in this
an additional mode of economic analysis of vineyard, and that the quantity of wine pro-
land rent. It implies that, over and above duced is a linear function of the amount of

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8 Land Economics February 1991

land set aside for producing Chateau Alpha. rent

This wine can be distinguished from other
wines. The demand curve for Chateau Al-
D
pha is downward sloping and the price
which can be obtained for it is higher if less
is produced. 1 Since the landowner/pro-
ducer faces a downward sloping demand ''
curve it is clear that monopolistic behav- p ·-·-·-·-·-·-·-·,~:-·-·-·-·-·-·
ior is possible. The output of wine could '
''
be restricted to increase total revenue. ''
, ', I
Whether this is worthwhile depends on
',, IR
other conditions. We shall analyze two
cases, called, following Buchanan, the Ri- 'f'
I ',
cardian and the marginalist cases. I ',,
I "\..,
The Ricardian Case 0 Q land

FIGURE 1
In the Ricardian case the land on which
the vines grow has no alternative use. This
appears to be the situation envisaged by by leasing out all the land available for the
Buchanan in the quotation above-"land is production of Chateau Alpha and in turn
so peculiarly fitted by nature for one prod- this means that the rent charged, OP, is the
uct, such as grapes, that is has no practical same as if there were no monopoly. There
alternative." Now in some circumstances, is in fact only differential rent. If the land
in this Ricardian case, the existence of OQ were owned by a very large number of
a downward sloping demand curve may landlords and let to a large number of ten-
make no difference, so that the rent ants, the price and quantity let would be
charged is the same as if the land were that indicated by the intersection of the de-
owned by a large number of competing mand curve, DD', and the supply curve,
landlords. This is illustrated in Figure 1, which is the vertical line QC, and this
OQ is the amount of land available for would be OP and OQ respectively, the
growing Chateau Alpha and it has no other same as in the "monopoly" case.
use. The landlord faces a downward sloping This is not necessarily true, however,
demand curve for the land, DD' since the and the second possibility is illustrated in
less wine is produced, the higher the price Figure 2. In this case the marginal revenue
and the higher the rent that a tenant might curve, DR, intersects the horizontal section
pay. In order to maximize his total income of the marginal cost curve at Q1• The land-
the landlord must set marginal revenue lord can therefore maximize income by
equal to marginal cost. only allowing OQ 1 to be cultivated and
Marginal revenue is indicated by the line leaving Q1Q vacant. The rent per unit is
DR. But marginal cost is zero as long as then OP 1 which is higher than the competi-
less than OQ is used and becomes infinite tive rent OP. PP 1 is therefore monopoly
if OQ is used, since initially there is no ad- rent but it should be noted that this exag-
ditional cost involved in leasing out more gerates the landlord's monopoly profits be-
land and, then, after OQ has been let, there
is no further land available for this purpose.
The marginal cost curve is therefore hori- 1It might as well be remarked here that in the ensu-

zontal along OQ and vertical along QC. In ing discussion I am not alleging that this is how the
producers of high quality, Appelation Controlee wines
the case illustrated in Figure 1 the marginal do operate, only that this is how they could operate.
revenue curve intersects the vertical sec- Whether they actually operate in the manner sug-
tion of the marginal cost curve. This means gested would make an interesting topic for research
that the landlord maximizes total income by a French Ph.D. student.

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67(1) Evans: Monopoly Rent 9

nt nt

'
Pi---------------'-,~,_--------------- ; A
p ---------- .. "" . ------r---
..... :
',.. !
',, ;
',
.. :
~

0 land 0 °-2 Q land

FIGURE 2 FIGURE 3

cause Q1Q is left vacant so the differential In Figure 3 the landlord owns OQ hect-
rent on this, OP, is lost to the landlord. The ares of land and this land and the adjacent
welfare loss to society is slightly greater land, can be used to produce, say, cabbages
than this by the amount of the consumer and yield a rent OP. As before, the demand
surplus which would have arisen on the lost curve for land to produce Chateau Alpha is
production. The total welfare loss is there- indicated by the downward sloping demand
fore the trapezium AQ1QD' in Figure 2. curve DD'. If the land area were owned by
Despite the fact that it is theoretically a number of land owners, competition for
possible that land could be left vacant to sites would result in the rent for land used
increase the rent obtained for the rest, it is to produce Chateau Alpha falling to OP so
rare, to put it no more strongly, to see land that all the land would be let at the same
being deliberately left vacant and held off rent whatever its use. In that event OQ2
the market in order to ensure a higher rent would be used to produce Chateau Alpha
on the land which is let out. Of course land and the remainder used to produce some-
is left vacant for speculative reasons or be- thing else.
cause of uncertainty about the future but If the landowner acts monopolistically,
not, so far as can be seen, for monopolistic however, revenue is once again maximized
reasons. But of course the Ricardian case by setting marginal revenue equal to mar-
requires that the land area has no alterna- ginal cost. Marginal cost is now the oppor-
tive use, and this assumption is extremely tunity cost of not using the land for Chateau
unrealistic. It invariably does have an alter- Alpha, namely the rent which would be ob-
native use, and in that case, as we shall tained in some other use. So the amount of
show, land will not be left vacant. land used for Chateau Alpha is set as OQ3 ,
by the point of intersection of the marginal
The Marginalist or Neoclassical Case revenue curve and the horizontal line indi-
cating the rent obtained in some other ac-
In what we may call, following Bu- tivity. The landowner gains a monopoly
chanan ([1929] 1957), the marginalist case, rent of PP3 from land which is rented out
the land has some alternative use. For ex- for the production of Chateau Alpha, and
ample, the land owned by the landlord may on the balance of his holding, where a lower
be used to produce Chateau Alpha, but also rent is charged, it must be a condition of
vin ordinaire or cabbages can be produced the lease that that land cannot be used for
on the land as is done in adjacent holdings. producing Chateau Alpha.

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10 Land Economics February 1991

Discriminating Monopoly been demonstrated so far is that it is theo-

retically possible that monopoly rents
Cases different from those discussed might exist in the wine industry. Whether
above are possible, but only one is consid- or not they actually exist would be a matter
ered here. 2 Wines from one part of the es- of empirical investigation. They probably
tate are designated Chateau Alpha and do; such an investigation would probably
those from another part are designated find evidence of monopoly rents. But even
Chateau Beta. The demand curves of each so the making of wines is an important in-
are both downward sloping but otherwise dustry in relatively few countries in the
differ. The position is as shown in Fig- world and the making of fine wines is im-
ure 4. portant in only one or two. Can and do mo-
If the land were owned by competing nopoly rents exist in other industries?
land owners and occupied by competing One has to be careful here to distinguish
tenants the rent would be indicated by the monopoly rents from increases in profits
intersection of the demand curves for the which occur because of more "normal"
two uses. If the amount of land is OQ and kinds of monopoly. For example a cartel
no other use is considered, then the equilib- which controlled the output of all or most
rium rent would be OPE in either use and of the world's diamond mines or oil fields
OQE would be used for Alpha and QEQ for would be able to ensure higher profits to
Beta. If the land is owned by a single land- the owners of sites producing these miner-
lord who can act monopolistically then the als, and any landowners who owned sites
rent of land to produce Alpha would be which were leased to producers could ex-
OPA and OQAB would be used. So the rent tract higher rents. Since the landowners are
for Alpha would be higher and the amount not apparently behaving monopolistically,
produced less. Conversely the rent for Beta merely, as usual, selling to the highest bid-
would be lower at QP8 and QABQ would be der, this author does not wish to argue that
used for producing Beta so that more would they are taking monopoly rents but he rec-
be produced. Less is produced of the wine ognizes that others may take the alternative
with the relatively inelastic demand. A sys- view. For example, Graziadei (1934) has a
tem of control would, of course, have to chapter on monopoly rent which relates to
allow the landlord to ensure that Chateau precisely this kind of problem-the monop-
Beta land is not labelled as Chateau Alpha. olization of sites at which minerals are pro-
In this instance it may be noted that al- duced.
though the landlord acts monopolistically Again, if planning authorities restrict the
the rent for Beta is lower. A positive mo- availability of sites for particular kinds of
nopoly rent for Alpha is partially compen- land use, and this results in the prices and
sated by a negative monopoly rent for Beta. rents of these sites being higher than they
otherwise would be, the author would not
V. MONOPOLY RENTS IN PRACTICE wish to argue that these higher rents are
monopoly rents. On the other hand, if par-
The analysis above demonstrates that ticular land owners operate through the po-
monopoly rents are possible, and that they litical process to ensure that competitive
can result in a welfare loss. The question land uses are not allowed permission for
remains open as to whether they exist in development by the planning authorities,
practice and are empirically important, or then the resulting higher rents certainly
whether, like Giffen goods and reswitching, would be monopoly rents. In this he would
they are theoretical constructs rarely, if
ever, observed in practice.
In this paper, vineyards producing fine 2Two such possibilities result from a mix of the
wines have been used to exemplify the ar- Ricardian and marginalist cases when the horizontal
gument. Marx and Buchanan drew their ex- price line PP'cuts the line QC between D' and R or
amples from the same industry. What has between Rand Qin Figure 3.

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67(1) Evans: Monopoly Rent 11

''
'
"'••,...
' ..
~ -·-·-·- ·-·-· ,"-:. __ ·-·-
'' .. De
P.E -----------.

', : i
_:·~---•' ~
0 QAB ~ land Q

FIGURE 4

agree with Harvey (1973, 192) that "the shops within the mall. The landlord can
planner in southeast England and the zon- therefore charge different rents to different
ing boards in the New York metropolitan tenants for otherwise indistinguishable sites
region have alike helped to create further where competition would otherwise ensure
opportunities for extracting monopoly equality. The rents charged can therefore
rents." It is sometimes alleged, for exam- depend on the characteristics of the users.
ple, that part of the reluctance of British There appear to be two ways in which land-
planning authorities to sanction "out of lords can act monopolistically.
town" retail developments stems from the Firstly a low rent may be asked of a pres-
political power of the town center shop- tigious multiple chain store such as Marks
keepers, although, or course, good plan- and Spencer in order to encourage the firm
ning reasons are adduced to justify this re- to take up space on the site, so that the
luctance. assurance that customers will visit the cen-
If monopoly rents exist, the evidence ter increases its attractiveness to other re-
would be that a single landlord charged a tailers to whom higher rents can then be
higher rent for one site than for another charged. There is certainly evidence that
which was otherwise indistinguishable. Or, this occurs. Indeed a British newspaper re-
to put it another way, a single landowner cently reported that not only were lower
would charge different rents for sites rents paid to some firms, but premiums
whereas, if the sites were owned by differ- might even be paid.
ent landowners, competition would ensure
that the same rents were charged. Marks and Spencer is reaping multi-million
A modem example of a situation where pound rewards by way of cash fees from its "an-
monopoly rents do seem to be charged is chor tenant" role in new regional retail develop-
the purpose built shopping center. 3 These ments.
properties are usually owned or operated M & S has received a substantial cash fee to
by a single landlord, and the characteris- guarantee its role as the star attraction tenant
tics of these shopping centers-a covered
shopping mall surrounded by car park- 3This idea was suggested by James Watson, a stu-
ing-means that shops outside the perim- dent of Land Management at Reading, now with Lov-
eter are not competing on equal terms with ell Homes Ltd.

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12 Land Economics February 1991

over three years in the £250 million Meadows of people visiting the center. An increase
Hall development in Sheffield. The fee will be in the number of drug stores would not do
taken into the profit and loss account over a so-existing trade will be simply divided
three-year period. This is a common practice in between them.
America and increasingly in the UK where such A recent study by West, Von Hohen-
major retailers as Burton Group, for example, balken, and Kroner (1985) demonstrated
are offered by the developer what is known as
a "premium" to act as a magnet for smaller re- that there was a statistically significant dif-
tailers in the new development. The traditional ference (at the one percent level) between
practice of offering anchor tenants discounted the types of stores in planned malls and in
and deferred rents is less attractive now that unplanned centers of a similar size. The
rents are softening. (The Observer, June 4th, malls had fewer drug stores, beauty and
1989, 57) barber shops, dry cleaners, petrol stations,
and banks. They had more clothing stores,
So different rents certainly are charged to of all kinds, shoe shops, and jewellers. So
different tenants at otherwise indistinguish- the results of this study provide evidence
able locations in new retail developments that the owners of planned retail develop-
where all the sites are owned by a single ments do let out space in a way which im-
landowner. If all the sites were in different plies that they are extracting monopoly
ownerships, competition would ensure that rents.
rents were equalized. Certainly in a normal
town center shopping area the owner of the VI. CONCLUSIONS
site on which Marks and Spencer is located
has no incentive to charge the firm a lower This paper has shown, firstly, that the
rent because the firm's presence would use of the term monopoly to describe the
ensure more trade in nearby shops. These landlord's power to control the use of land
rent differences are not conclusive evi- which he or she owns has a very long his-
dence of the existence of monopoly rents, tory. The term was often used to refer to
however. They might arise because of the the ownership of all land by the landowning
"internalization of externalities" and might class; so that all rents were monopoly
therefore remove a market imperfection rents. This usage died out with the advent
rather than create one. of the neoclassical synthesis, but the idea
The second example of what would seem of rent as a return to monopoly reappeared
to be evidence of the existence of monopo- in the 1930s with the increase in interest
listic behavior is therefore rather more con- in aspects of imperfect competition at that
clusive. As we have shown, a discriminat- time. In this usage the owner of an urban,
ing monopolist would discriminate between usually retail, site was regarded as having
land uses on the basis of the elasticities of monopoly power over the site so that the
demand of their products or services. So rent was a monopoly rent. This idea seems
we should expect the owner of a "planned" to have disappeared faced with the argu-
retail development to restrict the number of ment that the landlord did not appear to be
sites let to uses for which the demand is able to act monopolistically by restricting
inelastic, whilst increasing the amount of supply and charging higher rents but merely
space let to uses for which the demand is accepted the rent determined by the com-
elastic. petition for sites. The working out of the
For example, the number of drug stores theory of urban land use from the 1960s on
or pharmacies could be restricted since the further reduced the force of this view. The
demand is inelastic, and a high rent could supposed "monopoly rents" were shown
therefore be charged. The space so released to be differential rents.
could be used for, say, more women's The paper has shown, secondly, how-
clothing shops. An increase in the number ever, that, as suggested by Marx, monop-
of the latter is likely to increase the number oly rents may exist, over and above differ-

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67(1) Evans: Monopoly Rent 13

ential rents. These monopoly rents may be Economy. 7th ed., trans. E. F. Row. London:
obtained by the landlord if there is a down- Harrap.
ward sloping demand curve for the use or Graziadei, Antonio. 1934. La Rente de la Terre:
uses of the land. Finally we have shown Critiques aux Theories de Marx. Paris: Edi-
that there is evidence that monopoly rents tions Rieder.
*Guigou, J. L. 1982. Les Rentes Fonciere: Les
do exist, in planned shopping centers, at Theories et leur Evolution Depuis 1650. Paris:
least. Economica.
Harvey, D. 1973. Social Justice and the City.
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