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 land rent
theory. It assumes a central business district which represents the
most desirable location with
a high level of accessibility. The surrounding areas, within a radius of
1 km, have a surface of about 3.14 square (S=πD2). Under
such circumstances, the rent is a function of the availability
of land, which can simply be expressed as 1/S. At zero distance
the rent is the highest; 1. As we move
away from the center the rent drops substantially since the amount of
available land increases exponentially. There is more land available
to bid on, so if the supply goes up, the price
usually goes down. This rent / distance
relationship has an impact on land use.
- Rent. A surplus (profit) resulting from some advantage
such as capitalization and accessibility. It is based on the
capability to pay. The rent is usually the highest
for retail because this activity is closely dependent upon accessibility
to generate income.
- Rent gradient. A representation of the decline in rent
with distance from a point of reference, usually the central
business district. 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.
- 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.