What does the bid rent theory explain?

The bid rent theory explains how land values change with distance from the city center, highlighting the economic principle that land closer to the center tends to be more valuable. This is due to the increasing accessibility and the benefits derived from being near urban amenities, services, and employment opportunities. As one moves further away from the city center, land prices generally decrease because the utility of that land diminishes with distance. Essentially, businesses and individuals make decisions about where to locate based on the trade-off between land price and accessibility.

This concept is critical in understanding urban land use and the distribution of various activities within a city. It delves into how different user groups, such as residential, commercial, and industrial entities, will compete for space, resulting in varying land values depending on their location and proximity to the city center. Thus, the bid rent theory captures the dynamic relationship between land use, distance, and economic factors in urban environments.