Unequal Distribution as a Cause of Market Failure--Are Land Taxes the Remedy?

Given transactions costs and economies of scale in production, inequality of land ownership necessarily creates a labor and land market failure; the greater the inequality, the more severe the failure. This failure explains the regressive land use characteristic of less-developed agriculture: the larger a landowner, the lower the ratio of labor to land, and the less the output per unit area for constant land quality. A land tax, far from the neutral tax of conventional theory, imposes income and marginal effects that counteract this market failure. An output tax compounds market failure. In his 1879 classic Progress and Poverty, Henry George proposed that land taxes should replace all other taxes. Many economists before and after Henry George have favored land taxes, sometimes equating them to the ideal lump sum tax. Development economists often recommend land taxation as a less drastic means than land reform to bring underused land into production [de Janvry, 1993]. However, in a recent paper fro