Bid rent theory

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Bid rent theory is a geographical economic theory that refers to how the price and demand on real estate changes as the distance towards the CBD increases. It states that different land users will compete with one another for land close to the city centre. This is based upon the idea that retail establishments wish to maximise their profitability, so they are much more willing to pay more for land close to the CBD and less for land further away from this area. This theory is based upon the reasoning that the more accessible an area, the more profitable it is going to be.

[edit] Explanation

The different land users all compete with one and other for the most accessible land within the CBD. The amount that they are willing to pay is called Bid Rent. As a direct result of this, a pattern of concentric rings of land use develops. This creates the Concentric zone model.

It could be assumed that, according to this theory, the poorest houses and buildings will be on the very outskirts of the City (the suburbs), as that is the only place that they can afford to occupy. However, in modern times this is rarely the case, as many people prefer to trade off the accessibility of being close to the CBD, and move to the edges of the settlement, where it is possible to buy more land for the same amount of money (as Bid Rent states). Likewise, lower income housing trades off greater living space for greater accessibility to employment. For this reason low income housing in North America is often found in the inner city, and high income housing is at the edges of the settlement.

[edit] Agricultural analogy

Though later used in the context of urban analysis, the bid rent theory (though not yet using this term) has first been developed in an agricultural context. One of the first theoreticians of bid rent effects was probably David Ricardo, according to whom the rent on the most productive land is based on its advantage over the least productive, the competition among farmers insuring that the full advantage go the landlords in the form of rent. Later on, this theory has been developed by J. H. von Thünen who combined this early theory with the notion of transport costs. His model implies that rent at any location is equal to the value of its product minus production costs and transport costs. Admitting that transportation costs are constant for all activities, this will lead to a situation where activities with the highest production costs are located near to the market place. Those with low production costs will be further.

The concentric land-use structure thus generated closely resembles the urban model described above: CBD - high residential - low residential. This later model, introduced by William Alonso has in fact been inspired by von Thünens model.

[edit] Sources

• Location and land use, 1964, by William Alonso.
• "Essential AS Geography", 2000 By Simon Ross, John Morgan and Richard Heelas