For some opportunities this principle is widely recognized. An example would be the allocation of off-shore oil drilling rights. No one says that governments should decide how much drilling rights each oil company deserves, and pass the rights out without charge. It is recognized that the value of these rights ought to accrue to the public treasury, and any company that extracts the oil should be obliged to pay, through an auction, what the rights it exercises would have been worth to some other oil company. We believe that this principle should be applied to all opportunities that are assigned by governments.

Both for reasons of social justice and for reasons of economic efficiency, site value rating deserves a continued place in the programme of the Liberal Party.

The case for site value rating in terms of social justice is founded on two understandings: first, that the value of land in the absence of economic development is the common heritage of humanity, and second, that increases in the rental value of land arising from economic development and government expenditures should be collected by governments to finance those activities. What is meant by "land" is the unimproved value of sites and the value of extractable natural resources such as North Sea oil.

While there may someday be institutions capable of implementing a recognition of land as the heritage of all humanity on a worldwide basis, in the absence of such institutions each nation should implement a recognition that land within its boundaries is the common heritage of its citizens. This is accomplished not by making the nation a gigantic Common or by instituting government management of all land, but rather by requiring all persons and corporations that are granted the use of land to pay a fee or tax equal to what the rental value of the land they control would be if it were in an unimproved condition.

The case for site value rating in terms of economic efficiency is founded on the fact that a tax on resources that are not produced by human effort is one of the few sources of government revenue that does not reduce incentives for people to be productive. Two other revenue sources that have this virtue are taxes on other government-granted privileges such as exclusive use of radio frequencies and taxes on activities with harmful consequences, such as polluting the air. An economy will be more efficient if revenue sources that do not diminish productivity are employed to the greatest possible extent before any use is made of taxes that impede productivity.

What makes a tax efficient is that the amount of tax that is due cannot be reduced by reducing productive activities. When incomes are taxed, people can reduce the amount of taxes owed by working less. They do so, and the productivity of the economy falls. When houses are taxed, people can reduce the amount of taxes owed by building fewer house and smaller houses. They do so, and the housing shortage worsens. But when the unimproved value of land is taxed, there is no resulting diminution in the quantity of land. Thus taxes can be levied on land without diminishing the productivity of an economy. And shifting taxes from other, destructive bases to land will improve the productivity of an economy.

Subsequent sections explain in more detail these social justice and efficiency arguments for site value rating, describe procedures for implementing such a tax system, and explain why a variety of potential objections are without merit. ...

Before describing the valuation process, which employs auctions, it is useful to discuss the concept of a "second-price auction." A second price auction is one in which each bidder submits a single sealed bid, and the object is sold to the highest bidder at a price equal to the second highest bid. Second-price auctions have the advantage of making bidding simpler and more straight-forward. In an ordinary sealed-bid auction, in which the highest bidder pays what he or she bids, bidders are induced to under-bid strategically, not revealing the full value to them of the auctioned item, so that they can obtain it at a more advantageous price. This incentive for strategic underbidding is eliminated by a second-price auction. With a second price auction, a bidder who bids less than the object is worth saves no money as long as he or she is the highest bidder, and if the bid is low enough not to be the highest bid, the object is lost to another bidder. Nor is over-bidding beneficial. Either it makes no difference, or it results in the object being bought at a price of more that it is worth to the bidder. Thus honest statements of the value of the thing being auctioned are in the self-interest of bidders in second-price auctions. By a similar line of reasoning, when a contract is to be let to the lowest bidder, honest statements of the lowest price at which a party is willing to do the work can be obtained by letting the contract to the lowest bidder at a price equal to the second-lowest bid. There are two efficiency advantages to second-price auctions. Bidders do not have to spend resources trying to compute their strategically most advantageous bids, and because bids represent accurate valuations, the winning bidder is the person who values the object most, or can truly do the work at the lowest cost. It might seem that the amount received by the seller would be smaller in a second-price auction. However, the higher bids that result from removing the incentive for strategic under-bidding approximately offset the reduced returns from charging only the second-highest bid.... Read the whole article

Nic Tideman: Market-Based Systems for Assigning Rental Value to Land

This paper describes systems for assigning rental value to land through markets for the use of land that are created and managed by government officials. The central idea of the paper is that the full rent of land can be collected while achieving an efficient allocation of land if the rent for improved sites is revised annually, based on offers for the use of similar unimproved sites for the current year. The efficient allocation of land requires neither the sale of land nor leases of long duration at fixed rents.

Two systems for assigning rental value to land are presented. One system employs a market in which land is actually turned over to bidders for their use, while the other employs a market in options to use land. While these systems are applicable in many settings, they are particularly applicable to current conditions in the Soviet Union, where land is being transferred from public to private management. The new manager of each site will receive the profit or bear the loss from production on that site. The main question under consideration concerns the process to be used to determine how much must be paid for the use of each site.

A standard response of economists to such questions is, "Sell everything to the highest bidder." In the context of land in the Soviet Union, this would mean selling, for a lump-sum amount, the right to use each site into the indefinite future. However, for a number of reasons, such an approach is less attractive than selling the right to use sites for rent to be paid annually.

• First, the person who can make best use of the site may be unable to match a purchase bid from someone else, because of unequal access to lending markets (due to inequalities in wealth, for example). Selling land-use rights for annual rent makes sites more available to users with relatively little in assets.
• Second, uncertainty about future political conditions would tend to depress purchase offers. Selling land-use rights for annual rent requires the state to accept the risk of future unfavorable public policies, and thereby tends to promote favorable future conditions.
• Third, the high degree of general uncertainty about future economic conditions can lead to offers of less than the expected value of opportunities, simply because people have no idea how to guess what the opportunities are worth. Selling land-use rights on an annual basis permits many of the future uncertainties to be resolved before bids must be made.
• Finally, the returns from future use of a site can more justly be claimed by future generations than by the present generation.

Selling land-use rights for annual rent allows each year's population to claim that year's rent. While the proceeds of sales can be invested for the benefit of future generations, not collecting the money in advance helps preserve the heritage of the future against political predations. For all of these reasons, I assume that what is desired is not a purchase price but a rental price to be assigned to each site for each year. ... read the whole article