Theory of rent

The bid rent theory is a geographical economic theory that refers to how the price and demand for real estate change as the distance from the central business district (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 maximize 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 (i.e., the greater the concentration of customers), the more profitable.

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 rings of land use, creating the concentric zone model.

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 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 housing in many North American cities, for example, is often found in the inner city, and high-income housing is at the edges of the settlement.

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, 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.

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