Bid-Rent Theory

A theory of land valuation based on the geographic distance from an established point of maximum value represented by the Central Business District, or CBD. The theory is generally applied to urban environments but is adapted from the von Thunen model of rural land valuation. The urban geographer credited with developing bid-rent theory is William Alonso. The theory proposes an urban model in which a city occupies an unbroken plain, with no topographical barriers. The quality, cost, and availability of transport throughout the urban area are uniform, and at the heart of the urban space is a CBD that provides the maximum economic opportunity in the city and contains all the jobs in the urban area. 

It also assumes an atmosphere of perfect economic competition, where no one party has an advantage over others.Within this scenario, the following circumstances of land valuation and land use will occur. First, the land lying within the CBD and immediately adjacent to it will have the highest value, or bid rent. This is because land in the CBD represents access to the largest pool of consumers for businesses, and the shortest distance to work for residential users. Demand therefore for land within and close to the CBD will be quite high, and this will be reflected in correspondingly greater land costs. Manufacturing and retail businesses will be more willing to pay these higher costs for location closer to the CBD than residential users, who gain economic advantage only via lower transportation costs by locating in the CBD. 

The result is a series of zones or rings surrounding the CBD in which land values decline with distance from the CBD. Each zone is marked by a cluster of similar users whose specific distance from the CBD is determined by willingness to pay higher land rents. The innermost zone will be dominated by high-volume, high-value retailers who are willing to pay the maximum in land costs, due to the higher number of consumers and greater volume of trade made possible by the central-most location. The outermost ring will be occupied mostly by residential users, who accrue only limited economic benefit by being centrally located, in the form of lower transportation costs. In between will be zones dominated by lowervolume retailing, wholesale suppliers, manufacturers, and other users. 

The desire of each set of users to pay higher land costs as a function of distance from the CBD can be graphically illustrated via a bid-rent curve for each group. The curve for those willing to pay the highest bid rents in the CBD is quite steep, while the curve for those users who will only pay lower bid rent, located in the outer zone, is almost flat. In bid-rent theory, any residential users living closer to the CBD must cluster in high-density units (i.e., high-rise apartment buildings) to offset higher bid rents. The resulting pattern of urban land use is a set of circular zones, emanating from the CBD. This pattern of urbanization is called the Concentric Zone Model, and is one of several generalized models of urban morphology.