Land, in economics, is one of the factors of production and covers every natural resource used in producing goods and services: the ground itself, together with soil, water, forests, minerals, fish stocks and other gifts of nature. Unlike other inputs, land in this sense is not made by people and its total quantity is essentially fixed. Economists study it to explain property prices, agricultural output, resource wealth and the distribution of income between owners and users.
The payment for the use of land is rent, and the part of that payment due purely to scarcity and location is economic rent. Land differs from capital goods such as buildings and machines, which are produced and can be expanded, and from labor, the human effort applied to it. In everyday finance, "land" usually refers to a plot of real estate; the economic meaning is broader and includes the resources above and below the surface.
Land in plain terms
Think of everything nature hands us before anyone does any work: a field, a river, a seam of coal, a forest. That is what economists mean by land. People can farm it, dig it or build on it, but they cannot create more of it.
Because the amount is fixed, the price of good land rises when more people want it. A plot in the center of a booming city can be worth far more than a larger plot in the countryside, even though the owner did nothing to make it so. Location does the work.
Land in economic thought
The French Physiocrats of the 18th century, led by François Quesnay, regarded land as the only true source of economic surplus. Writers in classical economics treated land, labor and capital as the three great factors, earning rent, wages and profit. David Ricardo's theory of rent (1817) explained why the most fertile or best-located land commands the highest payments, and linked rising population to rising rents and the law of diminishing returns in farming. Henry George argued in Progress and Poverty (1879) that because land values are created by the community rather than the owner, they should be taxed, a movement later called Georgism.
Neoclassical economics often folds land into a broad measure of capital, but land economics remains a field of its own, covering urban property markets, agriculture, natural resource management and land tenure.
Valuing land
A simple way to value land is to treat it as a permanent stream of rent and discount it, which gives the capitalization formula:
Here is the value of the land, is the expected annual rent net of costs and is the discount rate, written as a decimal. A plot that can be leased for $10,000 a year, valued at a 5% discount rate, is worth $10,000 ÷ 0.05 = $200,000. The formula shows why land prices are highly sensitive to interest rates: if the rate falls to 4%, the same plot is worth $250,000. Since the supply of land is fixed, rising demand from population and income growth shows up mostly in higher prices rather than more land. In large cities, the land underneath a house often accounts for most of the property's value, which is why lenders secure a mortgage on land and buildings together.
Property rights, resources and the environment
How land is owned matters greatly for how it is used. Clear and secure property rights let owners invest, borrow against land and sell it; insecure or informal titles can hold back investment, a theme in development economics. Where land or resources are open to all, such as fisheries or common grazing, they risk overuse, the tragedy of the commons. Pollution of air, water and soil is a form of externality because the damage falls on others.
Resource-rich countries can earn large incomes from minerals and oil, often sold as a commodity on world markets, but sometimes suffer weak growth and poor governance, the so-called resource curse. Investors also hold land directly, for example farmland and timberland, as a tangible asset that may hold its value in periods of inflation.
Taxing land
Because land cannot move or be hidden and its supply does not respond to taxation, economists from many schools see a land value tax as one of the least distorting ways to raise revenue: tax incidence analysis predicts the tax falls on owners and does not reduce the amount of land. Estonia taxes land value rather than buildings, and Denmark's property tax includes a separate land-value element; some cities in Pennsylvania have used split-rate taxes that tax land more heavily than buildings. Critics point out that separating land value from building value is hard, that a new land tax lowers the wealth of current owners, including many households whose main asset is their home, and that it can burden land-rich but cash-poor owners such as farmers. Debates over land taxes often overlap with those on a wealth tax.