How High Is Schools' Implicit Land Rent?
By Bryan Caplan
If a business rents land, any accountant will count the rent as a cost of doing business. If a business borrows to buy land, any accountant will count the interest payments as a cost of doing business. What happens, though, if a business owns its land outright? A good accountant will estimate implicit land rent – the rent the land would have fetched in the open market – and count that as a cost of doing business. Opportunity cost, not out-of-pocket cost, is what counts.
The same logic holds, of course, for schools that own their land outright. If you’re estimating the total cost of education, you should count schools’ implicit land rent. As far as I can tell, however, official spending numbers don’t do this.
How big is the problem? To get a rough answer, I searched for estimates of (a) typical school acreage, (b) rent/price ratios, and (c) the price of an acre of land. What I found:
For (a), the best source I could find was a 1963 (!) piece by the Planning Advisory Service. The report begins by quoting their earlier finding:
Although acreage is related to size of school enrollments, most
authorities say that the minimum land area requirement for elementary
schools is five acres, with an additional acre for each one hundred
pupils of ultimate enrollment. Secondary schools should have a minimum
of ten acres, plus an additional acre for each one hundred pupils of
It then adds:
Although elementary school standards for minimum site
size have not changed appreciably during the past decade, those for
junior and senior high schools have increased rather dramatically, in
some cases 100% over what they were in 1952. The recommended size of
junior high sites ranges from 10 to 20 acres, with the median being 15
acres; recommended senior high sites range from 20 to 30 acres, with the
median being 25 acres. The standard formula of one additional acre for
each one hundred pupils of ultimate enrollment applies for both junior
and senior high schools.
For (b), I found the Lincoln Institute of Land Policy’s up-to-date numbers here. The current rent/price ratio is about 5%.
For (c), I found no usable nationally representative numbers. (Please tell me if I’ve missed anything).
Fortunately, we don’t need precise numbers on acreage price to see the magnitude of the effect. Consider a high school with 1000 students. Using the original rule of thumb, the school will have 20 acres. So even assuming a very steep land price of $500,000 an acre, the per-student cost of land is only $500/year. That’s less than 5% of total spending. Using a more normal – though still somewhat high – price of $100k an acre, implicit land rent only adds 1% to the education’s true cost.
Bottom line: Implicit land rent may be important in New York or San Francisco. But at the national level, it’s a rounding error.