THE RITSUMEIKAN ECONOMIC REVIEW

論

Vol. 68 No. 5・6

Mar 2020

171

説

PUBLIC VERSUS PRIVATE LAND OWNERSHIPAND URBAN ECONOMY
Xiao-Ping Zheng♯＊
Abstract
This paper examines the relationship between land ownership and urban economy. In
particular, the behavior of landowners is explicitly considered in the setting of the public
and private land ownership systems. The results indicate that in the equilibrium of theland market, public ownership has a higher possibility of excessive use of land or of
overpopulation than the private one. And, from the welfare viewpoint of the whole urban
economy, private ownership will result in a greater total surplus than the public one.
Key Words : land ownership, private ownership, communal ownership, state ownership,urban economy, land-use, total surplus

．INTRODUCTION

All economic phenomena relate to economic ownerships. This is especially true for Japanand China, since many economic problems in those countries are closely related to theirland ownership systems. For example, in urban Japan, land is privately owned by thegeneral public, which leads the Japanese people to believe in a so-called land myth (tochi
no shinwa, in Japanese) that land is the most valuable property in the world. As a result,most Japanese intend to keep on holding their own land, and the amounts of land supplied
to the land market become very limited. For this reason, the private land ownershipsystem in Japan is criticized for blocking the development of the urban public infrastruc♯I am grateful to the Faculty of Economics of Ritsumeikan University for providing me an
opportunity to take a sabbatical leave for the academic year of 2019, which enables me to revise
this paper and publish it here. Its earlier version has been presented at several academic
conferences and seminars in the past years. My thanks also go to those paticipants and reviewers
for their valuable comments on it. However, I alone am responsible for any remaining errors.
＊Faculty of Economics, Ritsumeikan University, Kusatsu, Shiga, 525 ― 8577, Japan
E-mail : zheng@ec.ritsumei.ac.jp( 605 )

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ture (NHK, 1987).
On the other hand, in Japanʼs most urban areas, there still exists a vast amount of landthat is owned publicly by the state and/or some public organizations. Most of these areas
are under-utilized or used very ineﬃciently, which causes the demand for land to exceed
the supply, leading to an imbalance in the urban land market (Yamamoto, 1999). For thisreason, the full use of publicly owned land has always been an important issue of the
public policies on land in Japan (see Harada and Inoue, 1991 ; Ministry of Land, Infrastructure and Trasport, 2004). It seems that the question of which of the public and private
land ownership systems is most appropriate to the urban economy is still open for further
investigation in Japan.
Turning to China, the problem of land ownership appears more important with greaterurgency. Since the start of economic reforms and an open-door policy in the late 1970s, themarketization of the Chinese economy has been going gradually forward. By now, various
markets of products, land-use rights, and labor have appeared across the country, and thenational economy has kept on growing at higher rates. However, the land of the country
still remains publicly owned. According to the constitution of China, farmers collectively
own the land of the rural areas, whereas the urban land belongs to the state, as it did in
the pre-reform period (World Bank, 1993).
Of course, since the late 1980s, some changes have taken place in Chinaʼs land ownershipsystem. The most important one was the separation of public ownership and private user
rights. Now in the countryside, farmers are granted the right to use the farmland and the
local government retains other rights associated with the ownership of the land. In urban
areas, the rights to use the land are transferred from the state to individual ﬁrms andhouseholds, and land ownership is still in the hands of the state. However, the land market
is still faced with many problems to be solved. For instance, in the transferring of therights to use land from the government to individuals, the government-led negotiation was
the main method used, while bidding and auctions were not often conducted (Zheng, 1998).
In this sense, the government has a great monopolistic power in the market of land (themarket of land-use rights, to be exact). Owing to this monopoly, sometimes the land is
supplied excessively, leading to a bubble in the real estate market, and sometimes there
comes a shortage of land, giving rise to a deﬂation in the urban economy. Is such a land
use and ownership system eﬀective ? Is the current public land ownership consistent withthe adopted market economy system ? The problem of land ownership in China is awaiting
solutions.
Questions raised from the land ownership system and urban economy in Japan and
China need an answer from urban economics. Unfortunately, however, the responses todate are not satisfactory. In modern urban economics, a theory on land use and urban
aggregate has been well established in the late 1980s (see Fujita, 1989), which can be( 606 )

PUBLIC VERSUS PRIVATE LAND OWNERSHIP AND URBAN ECONOMY（Zheng)

173

traced back to the works done by Alonso (1964), Muth (1969), Mills (1972), Solow (1973)
and Kanemoto (1980). Under this theory, land ownership is classiﬁed mainly into twosystems. One is the public ownership system, which means that the public owns urban
land and the rent from land is equally distributed to the urban residents. The other is theabsentee ownership system, which assumes that the landlords who live outside of the city
own urban land, and the rent from land also belongs to these absent landlords. Obviously,
the latter system means the private land ownership, but the existing literature rarely
makes it clear how these absent landlords behave, and whether or not they want tomaximize the rent from land. This is the ﬁrst weak point of the existing urban land-use
theory. Secondly, in the absentee ownership system, it is assumed that the general publicdoes not own land and the rent is also not distributed to them. For urban residents, landis owned as if it is publicly owned by a government who does not return the rent tothem. Thus, this kind of absentee ownership implies, in eﬀect, a public ownership. In thissense, the existing classiﬁcation of the two land ownership systems in modern urban
economics has not grasped the real meaning of the public and private land ownerships,
which leaves an important subject for further study.
As an attempt to answer this real-world question, which has not been satisfactorily
addressed by modern urban economics, this paper will examine the relationship of landownership and urban economy. In particular, the behavior of landowners will be explicitly
considered in the setting of the public and private ownership systems. These two landownership systems will be compared with each other from the view points of theequilibrium of the land market, urban population density, the consumerʼs and total
surpluses of the whole urban economy.
The results indicate that in the equilibrium of the land market, public ownership has ahigher possibility of excessive use of land or of overpopulation than the private one. And,
from the welfare viewpoint of the whole urban economy, private ownership will result in agreater total surplus than the public one.
The rest of the paper is organized as follows. In Section 2, a model of an urban economy
will be built, with a number of assumptions on land ownership systems proposed. The
equilibrium of the land market will be analyzed in Section 3 and the comparisons of public
and private land ownership systems will be carried out in Section 4. Finally, Section 5
concludes the paper and suggests directions for further research.

．AN URBAN ECONOMIC MODEL WITH LAND OWNERSHIP

Consider an urban economy that consists of a given number (N) of residents. Residents
consume land and other goods so as to maximize their utility levels. The utility function of( 607 )

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a representative resident is assumed to be the CES (constant elasticity of substitution)
type displayed below,


U = Z +L     0<ρ<1 ⑴

where L and Z indicate the amounts of consumption of land and of other (composite)
goods, respectively, and ρ is a parameter.
The resident is given a certain income (), and his budget constraint is written as
follows,
=pZ+RL⑵

in which p is the price of composite goods given from outside the city, and R represents
the rent of land.
Under the budget constraint, the resident is to maximize the utility level by choosing
appropriate amounts of land and other goods, which could be expressed as,⎧maxU = Z +L   ⎨   ⎩s.t.=pZ+RL⎜⑶⎜

It is supposed that the cost needed to secure the supply of land for the residents istechnologically given as an increasing function of the amount of land supplied, i. e.,C L =L   c>1 ⑷

where, c is parameter. Given such a cost function, the land is assumed to be supplied in a
way that is characterized by the land ownership system.
The paper divides land ownership into two systems, private and public. In the private
ownership system, urban residents privately own the land, and supply it to the landmarket so as to gain the maximum return from the market. In the public ownership one,on the contrary, land is publicly owned by urban residents. But public ownership can bedivided further into communal ownership, under which urban residents jointly own theland, and state ownership, under which the government acts as a representative of theresidents to own the land, supplying it to the market on their behalf.
It should be noted that the above-mentioned three land ownership systems are based on
the classical classiﬁcation in the economics of property rights (see Demsetz, 1967). The
new contribution to be made here is the addition of some assumptions regarding the
proﬁt-maximizing behavior of landowners, which will be stated and formularized in thefollowing.
Firstly, concerning the private ownership, since urban residents privately own the land,
it is reasonable to assume that they will supply it to the land market with a purpose to( 608 )

PUBLIC VERSUS PRIVATE LAND OWNERSHIP AND URBAN ECONOMY（Zheng)

175

maximize the proﬁt from the land. If the proﬁt can be written as π =RL−C L, theﬁrst-order condition of the maximization yields the following expression,dπ dC L 
=R−
=0
dL
dL

⑸

Secondly, under communal ownership, urban residents jointly own land and eachindividual decides the amount of land to supply to the market. It is conceivable that togain the maximum return from the land, an individual will continue to supply the land
until the average revenue equals the average cost. That is, the following equation holds,
R=

C L 
L⑹

This is, in fact, the situation that HARDIN [1968] described as “the Tragedy of theCommons”, in which the proﬁt from the land runs out and the land is exhausted (see asimilar expression made by Varian, 1990, pp. 552 ― 555).
Thirdly, as regards the state ownership, because land is eﬀectively owned by thegovernment, it can be supposed that the government monopolizes the supply of land,
which means that it could manipulate the price of land so as to maximize the proﬁt fromthe supply. Generally, the purpose of the governmentʼs behavior is not to pursue themaximum proﬁt. However, by observing closely the operations of Japanʼs land-developmentrelated public corporations that have land ownership, and those of Chinaʼs central and local
governments that transfer the rights to use land to individuals, one realizes that the
government or the public corporations put a high priority on returns in the supply of landin the real world. In this sense, the assumption that the government wants to have the
proﬁt from land maximized is not so far from reality. Thus, let the proﬁt be deﬁned asπ=RL−C L , the monopolized proﬁt could be made from the following condition,dπ
dR
dC L 
=
L+R−
=0
dL
dL
dL

⑺

．THE EQUILIBRIUM OF URBAN LAND MARKETSTo see the equilibrium properties of urban land markets, the demand function for andthe supply function of land need to be derived at ﬁrst, and then the equilibriums under
the three diﬀerent ownership systems can be compared.
.. The demand functions of land
From the utility-maximizing behavior of urban residents, expressed by ⑶, the per capita( 609 )

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demand function for land could be obtained as follows,

L =

R 
p




⑻



+R 

Similarly, the per capita demand function for other composite goods can be calculated as,




Z =

p ⑼

p  +R 

Given the number of urban residents is N, the total demand function for land can be
written as,






L ≡NL =

NR ⑽

p  +R 

Diﬀerentiation of the total demand function with respect to land rent yields,dL NR 
=−dR
 1−ρ   p  +R  

p




 R  +1−ρ <0⑾which implies that the total demand for land is a decreasing function of land rent.
.. The supply functions of land
Depending on the three diﬀerent land ownership systems, the supply functions of landalso diﬀer from one another. First of all, under the private ownership, using ⑷ and ⑸, thesupply function can be obtained as follows,

≡NL=N
L 

R
c

 




⑿

Second, for communal ownership, equations ⑷ and ⑹ yield the following supply functionof land,L
≡NL=NR ⒀

Third, the supply function of land under state ownership can be written as follows, using⑷ and ⑺,

≡NL=N
L

in which1dR c  dL L+R 




⒁

dR
L can be expressed in the following form, using ⑽ and ⑾,dL( 610 )

PUBLIC VERSUS PRIVATE LAND OWNERSHIP AND URBAN ECONOMY（Zheng)

dR
dR
L≡
L =−
dL
dL 







 1−ρ  p  +R  NR 

p
R

 




177

NR 

+1−ρ



p




⒂



+R 

Substitution of ⒂ into ⒁ gives the following supply function of land under state ownership,

=
L

N
c






ρp  R p +1−ρ R 






⒃




.. Comparison of the land market equilibriums of diﬀerent land ownerships
On one hand, a comparison of the supply functions of land between the private and thecommunal ownership systems yields the following result, using ⑿ and ⒀,


−L 
=N
L

R
c

 






 c  −1 >0⒄

On the other hand, using ⑿ and ⒃, a result of comparison between the private and thestate ownership systems can be obtained as follows,


L 
−L
=N

R

 c p + 1−ρR









in which, the components of the second 

















  p  + 1−ρR    −ρp     ⒅ can be shown to be positive, since,







Δ≡ p  + 1−ρ R  −ρp  =1−ρ p  +R  >0⒆This leads to the derivation of the following inequality,


L 
−L
>0

⒇

Combining the inequalities of ⒄ and ⒇ together gives,



L
>L 
>L

)

which means that, when the land rent is given the same level, communal ownership will
supply the most amount of land, state ownership the least, with private ownership
between them.
Based on ), and considering that the total demand for land is a decreasing function ofland rent, the total demand function and the supply functions of land can be illustrated asin Figure 1. Here, the supply functions are represented using straight lines just for thesake of simplicity. From this ﬁgure, it can be easily conﬁrmed that in the land market
equilibrium, there exist the following relations regarding the equilibrium rents and quanti( 611 )178

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Figure 1 Total Demand Function for and Supply
Functions of Land
L

LTD

LSco
LSpo

L＊co
LSso
L

＊
po

L＊so

0

R＊co

R＊po

R＊so

R

ties among the three diﬀerent ownership systems,
＊
＊
＊
R
<R 
<R
＊


＊


*

＊


L >L >L+That is, communal ownership supplies the most amount of land, at the lowest level ofrents, state ownership provides the least amount of land, at the highest level of rents, andthe amount of land supplied and the level of rents under private ownership fall between
the two.
The reason why communal ownership supplies the most amount of land, at the lowest
level of rents, is that under this ownership, urban residents jointly own the land and eachindividual will keep on supplying land until the average revenue equals (or drops below)
the average cost. As a result, the equilibrium amount of land becomes larger than under
the state and the private ownership systems, which also makes the level of rents lower
than those of the other two systems. China in the early 1970s of the pre-reform period andthe former Soviet Union saw phenomena of urban land use that were rather close to this(for a more detailed description of the land markets in China and Russia, see Malpezzi,1999).
State ownership provides the least amount of land, at the highest level of rents, because
under this ownership, the government monopolizes the supply of land, causing the amountof land supply to be less and the level of rents to be higher than those of the other two
systems. The current urban land market in China after economic reforms, and some ofJapanʼs urban land markets, where the government and public corporations own land,( 612 )

PUBLIC VERSUS PRIVATE LAND OWNERSHIP AND URBAN ECONOMY（Zheng)179

could be examples of this reasoning, though further investigation and interpretations areneeded to verify that conclusion. See Zheng (1998) for the Chinese case and Yamamoto(1999) for the Japanese case.
Finally, the conclusion that private ownership supplies an amount of land at a level ofrents that fall between those of the other two ownership systems means that private
ownership could bring about a relatively more moderate equilibrium for the land market
than the other two public ownerships. Common sense always dictates that land rents or
prices have a higher possibility to be soaring under private ownership than under publiclyowned systems. The unique division in this paper of the public ownership into the moredetailed categories of communal and state ownership helps to reach the above diﬀerent
and interesting conclusion.

,．WELFARE COMPARISONS OF DIFFERENT LAND OWNERSHIPS

.. Comparison of urban population density
Before comparing the welfare of diﬀerent land ownerships, the diﬀerences in urban
population densities are investigated at ﬁrst. By denoting the urban population density as
n*, it can be deﬁned as a reciprocal of per capita consumption of land, i. e.,n＊≡1 i=co，po，so L＊-Since the inequality of + holds in equilibrium, an inequality regarding urban population
densities can be easily obtained as follows,
＊
＊
n
<n＊
<n

.

which indicates that the urban population density reaches the lowest level under communal ownership, and the highest level under state ownership, with the density level under
private ownership in between. This is because communal ownership supplies the mostamount of land, causing the population density to be at the lowest level, while state
ownership provides the least amount of land due to the governmental monopoly of theland supply, leading the population density to be at the highest level.
.. Comparison of the consumer’s surplus
To deﬁne the consumerʼs surplus, Figure 2 is drawn by simply exchanging the verticaland horizontal axes in Figure 1. According to the deﬁnition of consumerʼs surplus (CS),under the communal ownership we obtain the following deﬁnite integral,( 613 )

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Figure 2 Consumerʼs Surplus and Total Surplus
R

LTD

LSso
LSpo

A

R＊c＊o
R＊so

LSco
R

＊
po

Rco
＊

0

＊


L so
＊

L＊po

L＊co

L

  L −R dL

CS=





＊


/

Similarly, the consumerʼs surplus under the state and private ownerships are written as
follows, respectively,＊  L −R dL
CS =  L −R dL
CS=

＊
 





＊


0



＊


1





The comparison of the areas in Figure 2, which are represented by the above deﬁnite
integrals, yields the following inequality,
CS>CS >CS2

which means that the consumerʼs surplus is the largest under communal ownership,smaller under private ownership, and the least under state ownership. The reason for thisis that communal ownership supplies the most amount of land, while state ownership
supplies the least, and the amount of land supplied by private ownership is between the
two. This, given that the total demand function for land confronting the diﬀerent ownerships is the same, leads to a level of equilibrium land rents at its lowest under communal
ownership, and at its highest under state ownership, with the equilibrium level under
private ownership in between. Such an order of rent levels makes the consumers undercommunal ownership to feel the happiest, those under state ownership the least happy,
and those under private ownership to enjoy happiness to an in-between extent.
( 614 )

PUBLIC VERSUS PRIVATE LAND OWNERSHIP AND URBAN ECONOMY（Zheng)181

.. Comparison of the total surplus
The preceding comparison result of the consumerʼs surpluses concerned only the welfare
of urban residents, or the demand-side for land. To see the welfare status of the wholeurban economy, we must also take into account the supply-side of land, or the welfare oflandowners. In fact, an important part of the whole welfare is the proﬁt from the land
supply, which belongs to the landowners and may be distributed to the residents,
depending on the ownership system in place. To see the diﬀerences among the threeownership systems with regard to the whole welfare of urban economy, the total surplus(TS) will be compared, which is the sum of consumerʼs and producerʼs surpluses (PS).
While the consumerʼs surplus under the three diﬀerent ownerships has been deﬁned
previously, to see the areas represented by the producerʼs surplus, the meaning of a curve,in Figure 2, is noteworthy. In that ﬁgure, L 
implies the supply function ofdenoted as L 

land under private ownership, which also means the marginal cost function (MC) of land
supply for all three ownership systems. Using this interpretation, the producerʼs surpluses
and thus the total surpluses can be easily deﬁned, as follows.
First of all, under private ownership, the producerʼs surplus can be written as,＊   R −L dL

PS =



＊





3

Summing up 1 and 3, the total surplus of the private ownership can be expressed by,TS =CS +PS 
＊
 

＊
 

  L −R dL+  R −L dL=  L −L dL
=





＊
 





＊




＊








4

Second, for state ownership, the producerʼs surplus and the total surplus are presented
as follows, respectively,＊  R −L dL

PS=



＊





5

TS=CS+PS
＊


＊


  L −R dL+  R −L dL=  L −L dL

=





＊






＊




＊








6

The deﬁnition of the area represented by the producerʼs surplus under communal
ownership system seems to be a little complicated. On Figure 2, we draw a vertical line＊, which intersects the curve L at point A, and then we draw a horizontal linefrom L( 615 )

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from A to the vertical axis at R
. R
is then the marginal cost when the supply of land＊＊＊
reaches L
. Using the meaning of R, the producerʼs surplus of communal ownership canbe written as,
＊


＊


  R −L dL−  R −R dL=  R −L dL

PS=



＊




＊＊





＊







＊＊


＊


8

Then, the total surplus of communal ownership is given by,TS=CS+PS
＊


＊



  R −L dL=  L −L dL=＊ L −R
dL+

＊








＊








9

The following are the comparisons of those three total surpluses, TS, TS  and TS.
To begin with, using Figure 2, TS  of 4 can be expanded in the following way,＊   L −L dL=  L −L dL+  L −L dL

TS =













＊




＊
 



＊





:

Since
＊
 

  L −L dL>0


＊





;

we obtain＊  L −L dL=TS

TS >








<



Similarly, using Figure 2, TSco of 9 can be rewritten as,＊  L −L dL=  L −L dL+  L −L dL

TS=













＊
 



＊


＊
 






?

in which＊  L −L dL<0
＊
 






@

Thus,
( 616 )

PUBLIC VERSUS PRIVATE LAND OWNERSHIP AND URBAN ECONOMY（Zheng)＊   L −L dL=TS

TS<








183

A



Inequalities < and A indicate that the total surplus under private ownership is larger
than either the state or communal ownership systems. In other words, the total surplus
under private ownership is greater than that of both forms of public ownership.
The results of this welfare analysis are very interesting and important. Based on thecomparison of the consumerʼs surpluses, private ownership is superior to state ownershipbut inferior to communal ownership. However, from the viewpoint of the total surplus, it isshown that private ownership is superior to both forms of public ownership. This alsomeans that under state ownership, even if the government distributes all the proﬁt earned
from its monopolistic supply of land to urban residents, state ownership is still inferior to
private ownership in terms of the total surplus.
Furthermore, the results correspond to the fundamental theorem of welfare economics
that if an economy is competitive, it is Pareto eﬃcient. This is because under private
ownership, marginal revenue is equal to marginal cost in the supplying of land, which isan important necessary condition of perfect competition. On the other hand, under state
ownership, the land market is not perfectly competitive because the government monopolizes the supply of land. And, under communal ownership, urban residents jointly own landand each individual continues to supply land to the market until the average revenue fromland supply is equal to the average cost for the supply. This is inconsistent with theperfect competition. In this way, under these two public ownership systems, the land
resource cannot be allocated as eﬃciently as under private land ownership.
Finally, it should be noted that, while the above-mentioned results sound like a mere
application of the fundamental theorem of welfare economics into the land ownership aﬀair,
such an application seems to have not yet been attempted in modern urban economics (e.
g., Henderson and Thisse, 2004 ; Duranton, Henderson and Strange, 2015) or in theeconomics of property rights (e. g., Pejovich, 2001). Moreover, those results appear
applicable to investigating the relationship between land ownership and urban economy in
the real world, and to solving those urban problems in Japan and China as mentioned in
the introduction of this paper.

B．CONCLUSIONSThis paper investigated how land ownership systems and urban economic welfare relate
to each other, using a theoretical urban model. In particular, the behaviors of landowners
under public and private ownership systems were explicitly considered, and the two( 617 )

184

The Ritsumeikan Economic Review (Vol. 68

No. 5・6)

diﬀerent systems were compared in terms of the equilibrium of the land market, urban
population density, and the consumerʼs and total surpluses. The main results from thecomparisons are as follows.
In the equilibrium of the land market, the public ownership has a higher possibility ofexcessive use of land (to be exact, under communal ownership), or has a higher possibilityof overpopulation (under state ownership) than the private ownership.
In terms of the consumerʼs surplus, private ownership is superior to state ownership, butinferior to communal ownership. But, from the viewpoint of the total surplus of the wholeurban economy, private ownership is proved to be superior to the both forms of public
ownership. These conclusions can serve as a useful reference for solving problems
regarding Japanʼs land use system and Chinaʼs institutional reforms of land ownershipsystems.
The further research that remains for the future includes the application of moregeneral function forms, rather than the CES type attempted in this paper, to show a moregeneral result that does not depend on the functional forms used. Further detailed study ofthe current situations and problems of land ownership and land utilization systems inJapan and China will also be worth pursuing, which will hopefully lead to the developmentof further practical and operational theories on land ownership and urban economy. It isalso worth noting that there have been several papers published, such as Zheng (2003),
which attempted to apply morden urban economics to other problems in Chinaʼs transitional economy.
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