Von ThUnen’s early theory of location differential rent, based on transportation savings and competition among land uses, was a more complete economic analysis set in mathematical form.
In von ThUnen’s model, each crop (land use) can bid a rent per unit of land at each location (distance from market), equal to the value of the product minus production costs and transport costs to the market.
The maximum rent offered for any location by producers of a particular crop depends solely on distance from the market (through transport costs) when non land production costs are assumed everywhere equal for each crop.
Land use in Rural and Urban area
Rural, or agricultural, land use theory considers land an essential input for production, with the physical characteristics of the land often determining the land use. Rural economic activities account for most land area. These activities locate in rural areas due to relatively high land-capital and land-labor ratios.
Urban economic activities tend to use less land but generate higher output (and land) value. Urban economic activities generally have lower land-capital and land-labor ratios, but emphasize location due to economies of agglomeration. 18
Walter Isard synthesized the von Thunen and combined modern production theory with location theory to extend urban-type externalities to the agricultural sector. Transport inputs to production (and marketing) measure factor services required “to overcome resistance encountered in movement through space where friction is present. In a space-economy, we obviously wish to minimize these, ceteris paribus” (बाकी सब एक सा होने पर)
Topography, transportation systems, and congestion can make effective economic distance different from mileage. Neighboring uses or other activities in the metropolitan area may affect the potential rent of land at any effective distance. Thus, externalities play an important role in land use theory, particularly in urban activities. Changes in demand or supply lead to an evolving structure in the general equilibrium system, with technological advances, transportation costs, and the mobility or pace of depreciation in capital stock influencing the rate of structural change.
Changes in demand or supply of land may also result from changes in environmental features such as soil erosion, climatic changes, silt accumulation, or catastrophes such as floods and fire.
William Alonso combined location and quantity in land use decisions and extended the use of bid rent functions from agricultural to urban land use theory .
Equilibrium in the land market involves one price (that of land) but two aspects (lot size and distance). Then “every user of land, whether a resident, an urban firm, or a farmer, determines his location by the point of tangency of the lowest of his bid price curves to come in contact with the price structure,” and
the market will be in equilibrium when
(1)no user of land can increase his profits or satisfaction by moving to some other location or by buying more or less land and
(2)no landlord can increase his revenue by changing the price of his land.
Site and quantity decisions must be based on substituting land for transportation costs and other inputs.
The new urban economics has focused primarily on residential land (which accounts for most privately developed land in American cities) but applied microeconomic theory to a wide range of urban topics (pollution control, zoning, suburbanization, discrimination, local government finances, and community development), using sophisticated mathematics to ground the resulting economic relations on individual behavior. 18
This new urban economics develop internally transportation systems’ capacities and
costs, particularly congestion costs.
It is assumed that relative prices determine and reflect rational behavior, and that institutional structures are more determined by than determining of economic behavior. Rent gradients continue to absorb differences in utility or profitability, determine the location of industries and residences, and determine the intensity of land use in each activity.
Techniques for studying transportation modal choice and residential location, which base decisions firmly on individual maximization behavior, have been extended to industrial location.
With production related to location decisions, the location question can be approached from Von Thunen’s view (which use will bid the most for a given piece of land) or Weber’s view (which site will yield greatest profit for a given firm).
Starting with a form for the profit function or bid rent function, the maximization process leads to the multinomial logistic model, which allows estimation of parameters affecting land use and production decisions. So far, however, empirical applications of these methods have not explicitly considered distance or transportation costs.
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