How does land rent work?

Land rent works by individuals paying for the right to access the productive capacity and amenities of a specific location. When you pay rent in an urban or suburban area, you're essentially paying for proximity to amenities like jobs, schools, and other attractions that make the area desirable. The value of these amenities and the area's productivity get absorbed into land prices, leading to higher rents as people outbid each other for access to these benefits 1.

The fundamental concept is that as more land gets bought and subject to private ownership, landowners can increase rents due to limited availability. This is explained with Ricardo's Law of Rent, which states that as the productive value of land increases, its rent also increases. An agricultural example illustrates this: if there are two fields where one can generate more wealth, people would prefer it, but if both are equal and one is owned by a landlord, tenants would need to pay rent to access it. The rent can be increased up to the margin of production or the next best alternative 1.

Moreover, land value is derived from the rental value, not the other way around. The selling price of land is based on the expected future income from it minus any expected taxes. Therefore, any shifts in policies, such as implementing a land value tax, impact the selling price but do not change the inherent productivity of the land 2.