Why land supply is inelastic?

Question

I am reading about Georgism, and I am puzzled by the notion that the land supply is inelastic. I posted a question in the reddit of georgism, but that left me more confused than before. It seems that I have a notion of supply with which not everybody agree. In the particular context of Georgism and the LVT debate, we focus on the supply curve of land.

The claim is that this curve should be a vertical line because no more land can be produced. However, as far as I understand, the supply curve represents the quantity of a product that sellers are willing and able to provide to the marketplace at a given price (see Wikipedia), not the total amount available in stock.

So my question is how do you define exactly the supply of land? Or for that matter, the supply of anything? If you consider the willing and able definition, then land would be like any other product at a fixed point in time.

Also, is the supply curve instantaneous, or should represent also the possibility of creating more products? (I guess the first, but so many people have argued with me for the second!)

Is this irrelevant for the LVT discussion, and in particular the understanding of the plot below?

Answer 1

The claim is that this curve should be a vertical line because no more land can be produced. However, as far as I understand, the supply curve represents the quantity of a product that sellers are willing and able to provide to the marketplace at a given price (see Wikipedia), not the total amount available in stock.

What you describe above is quantity supplied not supply i.e. what you describe would be particular supply at a given price $S(p=10)=100$. The supply curve represents the relationship between quantity supplied and price (see Mankiw Principles of Economics pp 73), i.e. for example supply curve could be $S(p)=10p$ or completely inelastic supply curve would be $S(p)=100$.

However, other than this you are completely correct, supply curve does not represent avaiable stock. It is irrelevant that planet Earth has fixed amount of land (and btw if you would ever visit the Netherlands you would learn that its wrong - NL has large land reclamation program, and in addition humans currently directly use only about 52% of Earth's land), supply curve for land won't be perfectly inelastic.

Empirically, supply of land is inelastic but not perfectly inelastic (fixed supply is equivalent to perfectly inelastic (i.e. vertical) supply. For example, Bar et al (2011) estimate that price elasticity of agricultural land in the US was between 0.007-0.029 depending on time period (elasticity of course changes from year to year). This is almost zero but clearly not zero so supply of land in the US is not fixed. You would most likely find zero price elasticity of land supply only if you look at some very narrowly restricted markets.

Also, is the supply curve instantaneous, or should represent also the possibility of creating more products? (I guess the first, but so many people have argued with me for the second!)

Supply curve is always defined in some time, may it be second, day, month a year etc. Supply curve can shift over time so you necessarily have to define it over some time period $t$.

The time period $t$ can be infinitesimal in principle, but you would be hard pressed to find any economic text that would define it at such a small time interval. Typically economic texts define short-run and long-run supply, where in micro short-run is defined as sufficiently long $t$ so that new firms do not have time to enter the market (do not confuse this with existing firms changing quantity supplied to the market) and long-run as sufficiently long $t$ so that new firms could enter the market.

Furthermore, note supply curve does not depend on the amount of products that exist or are on offer. That is quantity supplied, not supply curve. For example, at this moment there might be 100,000 cars supplied at the Dutch car market. That is quantity supplied. Supply curve at this moment might still be $S_{car} = \frac{1}{5000}p$.

Generally speaking the shorter time period the less elastic supply will be. However, as far as I understand Georgist never claimed that supply of land is fixed only over infinitesimal time intervals but generally. Otherwise, the Georgist argument about there being no deadweight loss from tax to land does not make sense. Yes there is no deadweight loss to any surprise tax. If agents have no time to discover there is new tax then of course they will act like there is no tax and deadweight loss is only created when agents behavior changes as a response to tax. But Georgists advocate for land value taxes to be used not just as a mere one-time surprises but as a general source of government revenue. In that case you cannot assume that the $t$ is infinitesimal (also over sufficiently small $t$ even demand should be inelastic).

This being said one can view that as a simplifying assumption (e.g. lot of physics assumes there is no air resistance or that natural vacuum in space is completely empty even though you get occasional molecule or atom flying around and so forth). For example, neoclassical economics also assumes people are rational even though they are only approximately so. If the price elasticity of land is 0.007 then simplifying that to 0 might not be unreasonable in supply-demand analysis.

Nonetheless it is worth noting, Georgism is not accepted by the vast majority of modern economists. It is a fringe idea, that never had large following in economics, but not because of this simplifying assumption. This is also not because economists would be opposed to land value taxes, many economists still advocate them being part of the tax mix, but I dont think there is any serious and credible policy economists advocating this should be the main source of government revenue, and Georgism has also some other ideas/implications that are generally not accepted.

Answer 2

Because as Mark Twain is reported to have quipped, "Buy land. They're not making it anymore."

Of course, the better explanation is that the image you have supplied merely depicts the short-run market for housing or developed land (pick your poison), which is fixed. Think of it this way: if you were given a substantial sum of money to buy any house, but had to buy at double its market value and occupy that house today, the housing stock available to you would still be very limited; and it's exceedingly unlikely enough people could clear out of their home and make it available to you if they didn't already have it for sale in order to capture your price premium. What's already on the market is pretty much all there is, and there's no waiting until tomorrow. Hence, the amount of homes available is constant, which translates into a vertical line on the graph.

This all changes as you move out of the short-run and into the medium- and long-runs, as the Second Law of Supply is that supply curves become more elastic the longer the time horizon. Say you had two weeks instead of only today. As more people have more time to clear out their house and make it available to you, then their willingness to sell becomes a factor, and the slope of the supply curve begins to become elastic: is double the market for their home above their reservation price? If so, they'd be willing to sell. Can they arrange movers in so short a time; with the price premium you are offering cover the costs of their move; etc.?

Answer 3

The chart shown is the market for owning land at some particular quality , since the land value tax is not applied at purchase, but continuously. At any given time, land at almost all gradations aside from ocean will be owned by somebody. The definition of land is naturally occurring features excluding improvements, so reclaiming ocean does not represent an increase in the supply of land, just an improvement on land. The reason why improvements are excluded from the assessment of the tax is because they would discourage development.