Source: Adapted from: Pászto V. (2020) Economic Geography. In: Pászto V., C. Jürgens, P. Tominc, and J. Burian (eds) Spationomy. Springer, Cham.
Three concepts are at the core of the land rent theory:
- Rent. A surplus (profit) resulting from some advantages such as capitalization and accessibility. It is based on the capability to pay and is a function of economic activity. 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. The combination of land prices and distances among which the individual (or firm) is indifferent. It describes the price range that a household (or firm) would be willing to pay at various locations in order to achieve a given level of satisfaction (utility/ profits). The activity that has the highest bid rent is theoretically the activity that will occupy this location.
Land rent theory assumes a central business district representing 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.