The bid rent theory is a geographical economic theory that refers to how the price and demand for

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

change as the distance from the

central business district A central business district (CBD) is the commercial and business centre of a city. It contains commercial space and offices, and in larger cities will often be described as a financial district. Geographically, it often coincides with the "city ...

(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 Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and t ...

establishments wish to maximize their

profitability In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It i ...

, 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 (i.e., the greater the concentration of customers), the more profitable.

Explanation

Land users all compete for the most accessible land within the CBD. The amount they are willing to pay is called "bid rent". The result is a pattern of

concentric In geometry, two or more objects are said to be concentric, coaxal, or coaxial when they share the same center or axis. Circles, regular polygons and regular polyhedra, and spheres may be concentric to one another (sharing the same center point ...

rings of land use, creating the

concentric zone model The concentric zone model, also known as the Burgess model or the CCD model, is one of the earliest theoretical models to explain urban social structures. It was created by sociologist Ernest Burgess in 1925. The model Based on human ecology th ...

. It could be assumed that, according to this theory, the poorest houses and buildings would be on the very outskirts of the city, as this is the only location that they can afford to occupy. In modern times, however, this is rarely the case, as many people prefer to

trade off A trade-off (or tradeoff) is a situational decision that involves diminishing or losing one quality, quantity, or property of a set or design in return for gains in other aspects. In simple terms, a tradeoff is where one thing increases, and anot ...

the accessibility of being close to the CBD and move to the edges of a settlement, where it is possible to buy more land for the same amount of money (as the bid rent theory states). Likewise, lower-income housing trades off greater living space for increased accessibility to employment. For this reason,

low-income Poverty is the state of having few material possessions or little

income

housing in many North American cities, for example, is often found in the inner city, and

high-income A high-income economy is defined by the World Bank as a nation with a gross national income per capita of US$12,696 or more in 2020, calculated using the Atlas method. While the term "high-income" is often used interchangeably with " First World" ...

housing is at the edges of the settlement.

Agricultural analogy

Although later used in the context of urban analysis, though not yet using this term, the bid rent theory was first developed in an agricultural context. One of the first theoreticians of bid rent effects was

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British Political economy, political economist. He was one of the most influential of the Classical economics, classical economists along with Thomas Robert Malthus, Thomas Malthus, Ad ...

, according to whom the rent on the most productive land is based on its advantage over the least productive, the competition among farmers ensuring that the full advantages go to the landlords in the form of rent. This theory was later developed by J. H. von Thünen, who combined it with the notion of transport costs. His model implies that the 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 the marketplace, while those with low production costs are farther away. The concentric land-use structure thus generated closely resembles the urban model described above: CBD – high residential – low residential. This model, introduced by

William Alonso William Alonso (January 29, 1933 – February 11, 1999) was an Argentinian-born American planner and economist. He was born in Buenos Aires but moved to the United States in 1946 during the Perón regime with his father Amado Alonso, a leading ...

, was inspired by von Thünen's model.

Bid rent theory in the central business district

Land users, whether they be

office An office is a space where an Organization, organization's employees perform Business administration, administrative Work (human activity), work in order to support and realize objects and Goals, plans, action theory, goals of the organizati ...

, or

residential A residential area is a land used in which housing predominates, as opposed to industrial and commercial areas. Housing may vary significantly between, and through, residential areas. These include single-family housing, multi-family residen ...

, all compete for the most accessible land within the central business district (CBD). The amount they are willing to pay is called bid rent. This can generally be shown in a "bid rent curve", based on the reasoning that the most accessible land, generally in the centre, is the most expensive land.

Commerce Commerce is the large-scale organized system of activities, functions, procedures and institutions directly and indirectly related to the exchange (buying and selling) of goods and services among two or more parties within local, regional, nation ...

(in particular large

department stores A department store is a retail establishment offering a wide range of consumer goods in different areas of the store, each area ("department") specializing in a product category. In modern major cities, the department store made a dramatic appea ...

and

chain stores A chain store or retail chain is a retail outlet in which several locations share a brand, central management and standardized business practices. They have come to dominate the retail and dining markets and many service categories, in many pa ...

) is willing to pay the greatest

rent Rent may refer to: Economics *Renting, an agreement where a payment is made for the temporary use of a good, service or property *Economic rent, any payment in excess of the cost of production *Rent-seeking, attempting to increase one's share of e ...

in order to be located in the inner core. The inner core is very valuable for these users because it is traditionally the most accessible location for a large population. This large population is essential for department stores, which require a considerable turnover. As a result, they are willing and able to pay a very high land rent value. They maximize the potential of their site by building many stories. As one travels farther from the inner core, the amount that commerce is willing to pay declines rapidly.

Industry Industry may refer to: Economics * Industry (economics), a generally categorized branch of economic activity * Industry (manufacturing), a specific branch of economic activity, typically in factories with machinery * The wider industrial sector ...

, however, is willing to pay to be in the outer core. There is more land available for

factories A factory, manufacturing plant or a production plant is an industrial facility, often a complex consisting of several buildings filled with machinery, where workers manufacture items or operate machines which process each item into another. T ...

, but it still has many of the benefits of the inner core, such as a marketplace and good transportation linkages. As one goes farther out, the land becomes less attractive to industry because of the reducing transportation linkages and a decreasing marketplace. Because householders do not rely heavily on these factors and can afford the reduced costs (compared with those in the inner and outer core), they can purchase land here. The farther from the inner core, the cheaper the land. This is why inner-city areas are very densely populated (with, e.g., terraces,

flats Flat or flats may refer to: Architecture * Flat (housing), an apartment in the United Kingdom, Ireland, Australia and other Commonwealth countries Arts and entertainment * Flat (music), a symbol () which denotes a lower pitch * Flat (soldier), ...

, and high rises), while suburbs and rural areas are more sparsely populated (with semi-detached and detached houses).

Application of bid rent theory

Bid rent theory has been operationalized in agent-based modelling, where it has been used to simulate the conversion of agricultural land into urban development, in a concentric city model.

References

{{Reflist

Sources

*Location and land use, 1964, by

. *"Essential AS Geography", 2000 By Simon Ross, John Morgan and Richard Heelas. Urban, rural, and regional economics