Maximization of equilibrium utility vs minimization of resources in the urban equilibrium

Abstract

We study welfare and the role of absentee landlords’ rent capture in one of the building blocks of urban economics: the monocentric city model. If only a fraction (but not all) of the absentee landlords’ land rents is captured and then redistributed, the market outcome minimizes resource usage but does not maximize residents’ utility. Therefore, when the utility-maximizing planner is unable to implement full taxation of land rents, she would prefer to intervene in the market outcome, while a planner minimizing resources would not. This difference implies that policy prescriptions crucially depend on the chosen welfare function (utility vs resources) and the land rent taxation rate.