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Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE 3. The supply and demand for land for residential develop- ment is shown.

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Presentation on theme: "Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE 3. The supply and demand for land for residential develop- ment is shown."— Presentation transcript:

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2 Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE 3. The supply and demand for land for residential develop- ment is shown in the diagram above. The land supplied for such development comes from privately held open- space land or privately held farmland.

3 Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) QeQe PePe PRICE a) Redraw the graph above and show how an increase in income will affect the equilibrium price and quantity of land converted into residential development, assuming that the land for residential development is a normal good. Demand 1 Pe1 Qe1 E1E1 E2E2

4 Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE b) Redraw the graph above and show how a decrease in government per-unit subsidies to farmers will affect the equilibrium price and quantity of land converted into residential development. Supply 1 Qe1 Pe1 E2E2 E1E1 Note: If you assume the Subsidy was for “selling” land, then any decrease Will shift Supply to the left. Generally speaking: less subsidy shifts supply left more subsidy shifts supply right

5 Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE c) Assume that the conversion of open-space land and farmland imposes costs on the general population, which can no longer enjoy the scenic vistas. i) Indicate whether the marginal social cost of converting land is greater than, less than, or equal to the marginal private cost of converting land. = MB P = MC P Supply 1 = MC T = (MC S + MC P ) MC T > MC P

6 ii) Explain whether the private market quantity of land converted into residential development is socially optimal. Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE = MB P = MC P Supply 1 = MC T = (MC S + MC P ) Pso Qso Private Q Qe Socially Optimal Q Qso No, because MC T > MB P Private Costs MC P fail to include all social costs

7 c) Assume that the conversion of open-space land and farmland imposes costs on the general population, which can no longer enjoy the scenic vistas. ii) Explain whether the private market quantity of land converted into residential development is socially optimal. Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE = MB P = MC P Supply 1 = MC T = (MC S + MC P ) Pso Qso Private Q Qe Socially Optimal Q Qso Too much land is converted into residential development.

8 c) Assume that the conversion of open-space land and farmland imposes costs on the general population, which can no longer enjoy the scenic vistas. ii) Explain whether the private market quantity of land converted into residential development is socially optimal. Supply Demand QUANTITY OF LAND FOR RESIDENTIAL DEVELOPMENT (ACRES) Qe Pe PRICE = MB P = MC P Supply 1 = MC T = (MC S + MC P ) Pso Qso Private Q Qe Socially Optimal Q Qso There is an overallocation of land to residential development.


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