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Introduction to Bid Rent Theory
Bid Rent Theory was developed by William Alonso in 1964, it was extended from the Von-Thunen model(1826), who analyzed agricultural land use. The first theoretician of the bid rent effect was David Ricardo.
Bid Rent Theory is a geographical and economic concept that explains how real-state price and demand vary based on the distance from the central business district (CBD).
According to this theory: Different land users will compete with one another for land close to the city center.
- Commercial Sector/Retailing: Retailers are willing to pay the maximum amount of rent to be located near the CBD/Market to minimize the transport cost (which will maximize their profit), increase the accessibility and visiblility to the consumers. They generate high revenue from prime location making the cost of rent worth it. Location near to the CBD ensures higher foot traffic. Examples; Departmental stores, Shopping Malls , Restaurants in the city area.
- Industry Sector/Manufacturing: Manufacturers need large area so they seek location slightly away from the CBD but the places with transportation links. Manufacturers also need access to market and labor but they are less important than for retailers. Bid rent curve is flatter than that of retailers but it’s steeper than that of residents because transport and logistics are more critical than foot traffic to the manufacturers. Examples; factories and warehouses located in industrial areas on urban periphery.
- Residential Sector: Residential people choose location farther away from city where land becomes less attractive to the Manufacturing and real state also gets cheaper. People can easily afford land at this point and housing can offer more space and better living condition. Bid rent Curve at this point is the flattest because they value affordability and quality of life over proximity to the market(CBD).
Advantages of Bid Rent Theory
- Provides clear understanding of land use(retail, industrial and residential) distributed in urban area.
- Bid Rent Theory helps in Forecasting the impact of infrastructure development on real state and urban expansion
- Simple and straight forward principles to explain the Urban phenomena.
- Helps policymakers for basic knowledge of urban land economics.
- Links land value with accessibility commuting costs and distance showing the transport influence.
- Serves as the basis for more complex urban models.
Disadvantage of Bid Rent Theory
- Oversimplification approach as it assumes a monocentric city model, which is rarely there in this modern era of polycentric cities with multiple activity hubs.
- Ignores the impact of historical, social, cultural land use patterns.
- Overlooks the externalities such as pollution congestion and environmental degradation.
- Doesnot explain about the irregular urban growth pattern in developing countries.
- Assumes that Rent markets function under perfect condition.
Practical Application of Bid Rent Theory
- Urban land use planning: Cities use this theory to zone central areas for commercial purpose and less expensive peripheral areas for residential purpose.
- Transportation planning: The extension of any transport infrastructure will lead to increase in land value encouraging mixed development.
- Land value assessment: Government Sets higher tax in central areas where land value is maximum and lower tax in residential areas where land value is flower.
- Economic zone planning: it helps to identify optimal location for economic or business zones.
- Affordable housing development: Directing housing projects to less costly Peripheral locations of urban market will help in affordable housing development.
Bid Rent Theory Mathematical Calculation
Bid-rent function theory can be calculated mathematically. Let U(x,h,T) be the utility function of a household where h is the amount of rental space, T is the amount of leisure time and x is the consumption of other goods & services. The budget faced by the rental space is that of:
px + rh + wT = y0 + w(1-t)
y0: Non-labor income.
: Wage rate.
t: Tax rate.
Summary table of Bid Rent theory
