Land Rent Theory and Rent Curve
Three concepts are at the core of the land rent theory:
The above figure illustrates the basic principles of the land rent
theory. It assumes a center which represents a desirable location with
a high level of accessibility. The closest area, within a radius of
1 km, has about 3.14 square kilometers of surface (S=πD2).
Under such circumstances, the rent is a function of the availability
of land, which can be expressed in a simple fashion as 1/S. As we move
away from the center the rent drops substantially since the amount of
available land increases exponentially.
- Rent. A surplus (profit) resulting from some advantage
such as capitalization and accessibility. The rent is the highest
for retail because this activity is closely related to accessibility.
- Rent gradient. A representation of the decline in rent
with distance from a center. This gradient is related to the
marginal cost of distance for each activity, which is how distance
influences its bidding rent. The friction of distance has
an important impact on the rent gradient because with no friction
all locations would be perfect locations. Retailing is the activity
having the highest marginal cost, while single family housing have
the lowest marginal cost.
- Bid rent curve function. A set of combinations of land
prices and distances among which the individual (or firm) is indifferent.
It describes prices that the household (firm) would be willing to
pay at varying locations in order to achieve a given level of satisfaction
(utility/ profits). The activity having the highest bid rent at
one point is theoretically the activity that will occupy this location.