Bid Rent Theory

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Assume for a moment, we live a life of not having the knowledge of cities. Population are dispersed evenly, with population density equal in all areas. Transportation to work do not exist because everyone works from home. Exchange of goods occurs instantly and at zero cost, no matter the distance. This assumption cannot exist because we cities existing, exchange is costly and dense area stand alongside spares ones.

The major reason of assuming a life without cities capitalizes on transportation costs. While movement of people and things across space is costly, cities allow us to congregate in order to exchange the goods and services we need. There is an economic advantage to agglomeration, leading firms and household to compete for the scarce supply of urban land.

This competition creates rent disparities across space, as the price of advantageously located property is bid up relatively to other areas. Urban economist notice this disparities and brings up the theory of bid rent theory considering the two major competing variables “land use and land value”.

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