Why Location Matters: The Bid Rent Curve

Classic land use theory holds that rent is a function of distance from the center of commercial activity. Land users bid against one another, paying higher rent for proximity to the center of business based on respective transportation costs. At one extreme, those with the highest transportation cost will outbid others for land nearest the center. Alternatively, for land far from the center, value drops to zero when it is no longer profitable for anyone to locate there; hence no rent will be paid for such land. The plot shows a dairy farmer with high transportation costs outbidding a wheat farmer whose transportation costs are lower.