Why is the rent so high?

When you rent a building to run a business, you are renting two things: the use of the building, and the location in which it is built. A coffee shop in the middle of a bustling city takes in more revenue than one in the outskirts, and so its location is more valuable.

How much of the bustling coffee shop's revenue will end up going to rent? As much as a landlord can get away with. If the landlord goes too high, then the coffee shop will move to a different location. Even the outskirts will be better than the center of the city if the rent is too high. But so long as the coffee shop can still keep slightly more of its profits than it would make in the outskirts, it will stay and deal with the high rent.

This is Ricardo's law of rent: rent is the difference in productive capacity between the chosen location and the worst location. To some extent, it doesn't matter what location the coffee shop chooses. Any excess profits they would have gained from a better location just go to the landlord, and so their "kept income" stays the same.

But it gets worse. As a city grows, two things happen: the outskirts move further and further out, and the best locations become more and more valuable. Slide the "City size" to see these effects on our graph. The "outskirts moving further out" is represented by adding a bar to the left, and "the best locations become more valuable" is represented by adding a bar to the right.

The leftmost bar represents the worst location our coffee shop could be. It also, according to Ricardo's law of rent, dictates how much of its profits it can keep for itself. When the worst location is replaced by an even worse location, kept profits decrease across the board. Our coffee shop keeps fewer profits over time, no matter where they are located.

As society progresses, the blue shrinks, and the pink grows. Progress is a wedge that increases the divide in wealth between the land owners and the landless. Progress is the cause of poverty!

Fortunately, there is a fix.