Land Rent Theory and Rent Curve

Three concepts are at the core of the land rent theory:

• 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.

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.