Debate Magazine

Embedded Rents.

Posted on the 17 July 2015 by Markwadsworth @Mark_Wadsworth

Common sense and simple observation tell us that:
a) Goods in shops cost pretty much the same across any country;
b) Rents diverge wildly; the additional rent you pay in a high wage area soaks up most of the higher wages in that area.
c) There is an intermediate category; services (consumed at point of purchase), which are more expensive in high wage areas, but the differential is not as big as for pure rents. Part of what you are paying for is 'space', the cinema seat, the dentist's chair, the table at the bar etc; which I refer to as 'embedded rent'.
An American Home-Owner-Ist organisation called "The Tax Foundation" does some excellent statistics. They link through to The Bureau Of Economic Analysis.
Scroll down to page 9 and you will see that:
a) The price of 'goods' hardly varies across the country (lowest 94.1, highest 108.3)
b) Rents vary wildly (lowest 62.9, highest 158.7)
c) Services is somewhere in between (lowest 91.1, highest 115.9).
The co-efficient of correlation between (a) and (b) is 0.88, i.e. about 88% of the variation in the cost of goods can be explained by variations in rents. The co-efficient of correlation between (b) and (c) is 0.83, i.e. about 83% of the higher cost of services can be explained by the higher rents. And the causation could just as well be the other way round...
But either way, the influence which higher (or lower) rents has on the price of goods and services is small (one-fifth and one-third respectively). So for example, if rents are 10% higher, goods are only 2% more expensive and services are only 3% more expensive.
Which debunks, yet again, the silly KLN that a tax on the rental value of land would be passed on to consumers as higher prices. Higher rents themselves do not push up the price of goods and services (excl. the embedded rent element), and as the tax is paid out of the rent, the total rent cost does not change.
By and large, it is the number of units which can be shifted from any location which dictate the rent, even if the gross profit per unit is exactly the same in all cases.

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