The Fixed Location of Land Creates Varying Degrees of Monopoly Power in Land Ownership. in Turn, This Gives Rise to the Need

The fixed location of land creates varying degrees of monopoly power in land ownership. In turn, this gives rise to the need for expropriation and justifies certain land use planning policies because of externalities. It also creates value differentials between parcels of land resulting in the need for location adjustments in appraising properties. Finally, the fixed nature of land creates bilateral monopoly markets, a source of considerable difficulty for appraisers. By David Enns Introduction Monopoly power Every time we write an appraisal report, Monopoly power, on the other hand, Most markets are not considered to we define market value for our client comes from there being a lack of competi- be monopolized because there are usu- as being “the most probable price that a tion in a market, i.e., from having a prod- ally a reasonable number of close substi- property should bring in a competitive and uct (or service) that that does not have a tutes. In all property markets, however, open market under all conditions requi- very good substitute. In the extreme case, any substitute properties are close but site to a fair sale, the buyer and seller when there is only one seller facing are never perfect substitutes. There is a each acting prudently and knowledge- many buyers, no close substitute and singular important reason for this and ably, and assuming the price is not blocked entry of new firms (additional that is because the location of all prop- affected by undue stimulus.” 1 [emphasis producers/sellers), we have what is erty is fixed in space. Thus, each prop- added] known as a monopoly. Bell Telephone, of erty is unique, at least in respect to its These are conditions that economists course, was a monopoly before the new location relative to all other properties. would deem to be part of a competitive technology of wireless cell phones and Although there is said to be slightly over market. In the extreme case, a perfectly the deregulation of the telephone indus- 32 billion acres of land in the world competitive market is one where there try. Monopolies can set their price or their (excluding Antarctica), no acre has the are a large number of buyers and sellers level of output but they cannot do both at same location as any other. such that none, acting alone, can influence the same time. Further, because of the fixed location price. Each market participant is too small of land, no arbitrage can take place in to affect any change on price and it Fixed location and monopoly power property markets. Arbitrage is the pro- assumes that there is no price fixing or In property markets, there is often a sig- cess of buying and selling assets between collusion on the part of sellers. As well, it nificant amount of monopoly power on two markets, separated by space, in assumes that the product is identical from the part of property owners. This is a order to make a profit from any price one seller to another such that a buyer can feature of property markets that is often differential between markets. Arbitrage find a perfect substitute from any one of a ignored by professional economists who reduces price differentials between mar- number of alternative sellers. While there tend to concentrate on macroeconomics.2 kets because the process itself raises are other conditions that are also assumed However, even land economists have supply in one market and demand in to exist in such competitive markets, these been known to ignore monopoly ele- the other.4 It is practiced in commodity, are the critical ones. ments in land markets.3 currency and stock markets and is the 20 The Canadian Appraiser • Spring • 2002 • Printemps • L’Évaluateur Canadien reason, for example, why there is only Monopoly power and expropriation In appraising the value of a property, one world price for gold. Because of the fixed location of land, while we recognize the location of a prop- This unique fixed location character- monopoly power on the part of certain erty as an important attribute in many istic of land creates at least some ele- property owners is quite significant in instances, we do not dwell on this differ- ment of monopoly power for each and some situations. For example, it creates ence. Further, we usually assume that the every landowner. In many instances, a the rational for the expropriation of land comparable properties have all sold in a variation in location from one property by a government for the public good. reasonably competitive market. to another has no real significance and Alternative sites, due to land being fixed any difference in location is trivial. in space, are not acceptable for a new Bilateral monopoly For example, two identical residences highway that is designated to go through However, not all property sales occur in located on the same street (both interior a particular corridor. Should a highway such a competitive market. A bilateral lots) would each have a unique position need widening, only those sites beside market is a market structure that is far in space, but would probably have no the existing roadway are needed, no other removed from a competitive market of difference in value due to their different sites will suffice. Accordingly, because of many buyers and many sellers.5 A bilat- locations. their monopoly position, property owners eral market is a market structure that has could prevent the construction of such only one seller and only one buyer. Two Fixed location and externalities public infrastructure by refusing to sell situations are of interest to appraisers in Before we turn to the issue of monopoly their property. This gives rise to the this regard. One deals with water lots power in property markets, it is note- power of eminent domain on the part of and the other deals with what some worthy to mention one other aspect of governments. If land was moveable, the refer to as non-viable properties, how- the fixed location factor of land. Exter- required property could simply be pur- ever, both are an example of a bilateral nalities are often significant in property chased elsewhere. market. markets because of this fixed location This same element of monopoly power factor. Smoke and noise pollution are may prevent private redevelopment Water lots two examples of external costs that schemes from moving forward. With Water lots are defined as “an area of are imposed on adjacent properties by checkerboard ownership of land, partic- land either contiguous or attached to dry nearby activities. These are costs that, ularly in central urban areas, one land- land, or may be entirely separated from in most circumstances, do not fall on owner can easily stop land assembly for dry land; usually covered with water, the activities giving rise to them. If the urban renewal projects from taking place but not necessarily at low tide. It may effects are negative, economists refer to by asking an above-market value for be filled or partially filled.” 6 Water lots them as negative externalities (if they their property and expropriation cannot almost always sell (or get leased) to are good they are positive externalities). be used to facilitate private projects, as it the adjacent (or upland) property owner. These are very common and give justifi- can for public projects. That adjacent landowner, whose prop- cation to land use planning in the form erty is bounded by a natural body of of zoning regulations. Zoning attempts Location, location and location water, under the common-law riparian to group together similar land uses All of us have heard the expression that doctrine, has the right to use those that are complementary to one another what lies behind a property’s value is waters to which they are riparian (relat- (they generate positive externalities) location, location, location, and, indeed, ing to a riverbank) for navigating and and separate obnoxious land uses (that location is much more important for some recreation purposes. 7 generate negative externalities). The property types than for others. Commer- If we are to estimate the market value fixed location of land and the close cial properties, of course, rely on their of a water lot, we will look to the sales proximity of urban activities dramati- exposure, accessibility and complemen- of other water lots in order to see if there cally compounds the problem of nega- tary aspects (all attributes of location) for are some benchmarks that we can utilize. tive externalities. Contrast one factory much of their market appeal. This trans- However, these sales occur in a bilateral polluting one adjacent residence with lates into a higher order use (and hence monopoly market and virtually all water four polluting factories adjacent to four higher land value) for some properties lots are sold in this type of market. As residences. The fourfold increase in than for others. So, if a property has a a result, appraising in this market struc- activity (from one to four factories) superior location than its comparables, ture is quite difficult. results in 16 times the amount of pollu- appraisers deal with that feature, if it is Imagine a residential water front tion as each factory now pollutes, not warranted, by making an adjustment in property (owner X) along the shore of a one, but four residences. the appraisal process for location. river or lake as shown in Figure 1, and The Canadian Appraiser • Spring • 2002 • Printemps • L’Évaluateur Canadien 21 a water lot (owner Y) in front of that argument and purchase the water lot for Non-viable properties property. Owner X may wish to purchase a nominal amount.

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