Question
1. a. b. C. The following chart is a very simplified representation of the demand and supply of land for urban use that we
1. a. b. C. The following chart is a very simplified representation of the demand and supply of land for urban use that we introduced in class. The amount of land in urban use is represented by the distance, x, from the central business district (CBD) to the edge of urban land. The demand curve, r(x), represents the social marginal benefit (or marginal rent) from converting agricultural land into urban land. The supply curve represents the amount of land that is available at any given rent (r0). This represents that marginal opportunity cost of converting land from agricultural to urban use. Without any market failures, i.e., without externalities, land that is less than x* miles away from the CBD should be converted to urban use. Land that is more than x* miles away from the CBD will remain in agricultural use. In other words, (x*, r0) represents the efficient land use and land rent. (special note: You need pay close attention to what the curves represent? Do they represent market demand or supply or marginal social benefits or costs?) Based on the chart, give one possible market failure related to the amount of land devoted to urban use. For the given market failure, please do the following: Land rent Explain the market failure. In the chart below, show how the market failure will lead to a market equilibrium that is different from (x*, r0). (To answer this question, you need to consider what the marginal benefit and cost curves would look like in the presence of the market failure you describe). Explain one remedy that will help correct the market failure that you describe. r(x) ro 3 ro ** Distance from CBD in miles
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