Scott: It's the private collection of the value of the location.
Bill: Well, I'll give you a good example. You know the game of tic-tac-toe. Now suppose we have 9 squares in an open field and the lines of the tic-tac-toe are roads . And then, all of those plots of land are sold, and then people develop every plot except the center plot. So, one guy builds a gas station and someone else might build a pharmacy. Someone else might build a grocery store"or all the way around except the center square"
Timothy: And they'll be worth the most"
Bill: Exactly. And what happens to all of the land value now that there is economic activity in what was earlier just an open field?
Timothy: It becomes more because"
Bill: Right! And which piece, which square has the highest market value?
Timothy: The middle one.
Timothy: Because there's all things which"uh"
Scott: The demand.
Timothy: Yeah, there's all the demand.
Bill: Right. All the access to the other squares comes from the center square, so that center square is really the most valuable. And that value did not come from what the owner of that central parcel did. It comes from all the effort of all the other people in the community who have market exchanges "the rent is community-generated. So, that's true in any city, for example. The value of the land in the city is due to everyone's activity, not one person's. So even the guy who owns a parking lot, his value increase s because all the other lots around it are doing something. So, that the highest value land is where the people are , and where the people are meeting and making exchanges. We're out here (in the country) for example where there are very few market ex changes.
Timothy: So the land here "just doesn't have the value?
Bill: Well, if we collected the economic rent back the community which generated it then the carrying cost s to the people who own those parcels would go up, and th os e people would be induced to build on them so that they could get a return on their investment. But if society just leaves economic rent in the hands of the owner s , then they can just go live in Florida or just go to sleep"and they get rich without doing anything. ( Philosopher John Stuart Mill said that "the landlord gets money in his sleep.")
Timothy: Because everyone builds around him!
Bill: Right! Exactly. So you got it!