The document discusses the trade-off theory of urban land use, which was proposed in the 1950s in response to traffic congestion. It was further developed in the 1960s-1970s by economists who related land use patterns to transportation systems. The theory uses bid rent curves to show how households trade off access and space based on income, minimizing costs of commuting. Land values are highest near the urban center and decrease with distance, influenced by transportation costs and demand for space.

1. URBAN ECONOMICS
Dr. Mousumi Ghosh

2. THE TRADE OFF THEORY
The trade Off Theory was proposed in the1950’s to
explain the divergence of many cities from the
pattern described by Burgess.
It came in large measure as a response to traffic
congestion experienced in urban areas especially in
America.

3. THE TRADE OFF THEORY
The trade Off Theory was expounded in the 1960’s
and 1970’s by a group of economists [ Wingo (1961),
Alonso (1964), Muth (1969) and Evans (1973)]
The theory relates land use to the transport system
within the cities

4. THE TRADE OFF THEORY
According to Muth, the Trade-off model explains the
predominance of high-quality housing on the city
perimeter in terms of the trade-off between access
to central locations and household demand for
space.

5. THE TRADE OFF THEORY
Key Assumptions :
Housing conditions in any area would adapt to the
kind of households located there. ( Demand-side
theory)
A large city with a CBD to which all the workers
commute
It is located on a flat plane with no topographical
features.

6. T
THE TRADE OFF THEORY
Key Assumptions
The transport system carries commuters from the
suburbs to the centre with equal efficiency.
There are no externalities of any kind
The crucial factor for residential location- cost of
journey to work

7. THE TRADE OFF THEORY
Households objective- Minimization of the cost of journey
to the work place
Impact:
Increase in demand for inner-city locations
→Cost of land and housing in the inner city > than in the
suburbs
Competition for sites will result in land values being
highest at the centre of the city and falling at a
decreasing rate at sites further away from the city centre

8. THE TRADE OFF THEORY
Pattern of Residential Location –The Determining
Factors
•Requirement of the amount of space-Large amount
of space requirement indicates location at a distance
from the city centre.
•Direct cost of travel
•The opportunity cost of the time spent travelling

9. THE TRADE OFF THEORY
Expected behavior of households
•High proportion of workers in the family- location close
to the city centre, few workers in the family - away from
the centre.
•Increased income of the households-greater demand for
space:
2 possibilities
i) Location further out from the city centre
ii) Nearer the centre, as the value of travelling time
increases.
Condition: Elasticity of demand for space w.r.t .
Income e>1: Richer households will locate on the edge
of the city, poorer at the centre.

10. THE TRADE OFF THEORY
Importance of the Trade off theory- Basis for a General
Equilibrium Analysis of the urban land market
The Bid-Price curve
Bid-Price Curve-The residential bid price curve is the set
of prices for land the individual could pay at various
distances while deriving a constant level of satisfaction

11. THE TRADE OFF THEORY
Alonso extended the Von Thünen model to urban land
uses
-- A model for an economic equilibrium in the market for
space
The model gives land use, rent, intensity of land use,
population and employment as a function of distance to
the CBD of the city

12. Von Thünen’s Theoretical Model
Von Thünen developed a theoretical model before the
first large-scale industrialization that describes how
market processes determine local land-use patterns.
He explained it in terms of agricultural land use around a
central market city. The findings are however not
restricted to agriculture alone.

13. Von Thünen’s Theoretical Model
Assumptions:
•The central city is located centrally within an ‘Isolated
State’ which is self-sufficient and has no external
influences.
•The Isolated State is surrounded by an unoccupied
wilderness.
• The land of the State is completely flat.

14. Von Thünen’sTheoretical Model
• The soil quality and climate are consistent throughout
the state.
•Farmers in the Isolated State transport their own goods
to market via oxcart, across land, directly to the central
city. Transport costs rise linearly with distance.
•The selling price for the agricultural products is
determined at the market by supply and demand.
•Farmers act to maximize profits.

15. Von Thünen’s Theoretical Model
Central City
Intensive Farming/Dairying
Forest
Extensive Field Crops
Ranching/Animal Products

16. Von Thünen’s Theoretical Model
•1st Ring- Dairying and intensive farming -closest to the city.
• 2nd Ring-Timber and firewood for fuel and building materials
(Before industrialization (and coal power), wood was the main fuel It
is heavy ,difficult and costly to transport).
•3rd Ring- extensive field crops e.g.grain for bread. Grain more
durable than dairy products ,lighter than wood. Transport costs are
considered to be lower, allowing a location further from the city.
• Final Ring-Ranching -surrounding the central city. Animals can be
raised far from the city as they are self-transporting and thus have
low transport costs.
•Beyond the fourth ring lies the unoccupied wilderness, which is too
great a distance from the central city for any type of agricultural
product.

17. Von Thünen’s Theoretical Model
It is possible to derive the land rent from this model. The farmers that
grow a particular product prefer to locate closer to the city, as their
profit will be higher.
For land closer to the city, they are willing to pay a land rent which is
at most the profit they make at that location.
The economic rationale behind the model is described in terms of
profit and distance from the market. Land closer to the city will have
a higher price than land that is located further from the city.

18. THE TRADE OFF THEORY
In the von thünen model the bid-rent function declined as a result of
the increased transportation costs to transport the produce of one
unit of land at one additional unit of distance.
The von Thünen model required considerable modification to apply
to residential, commercial and industrial land use.
A preliminary rationalization of a bid-rent function for a household
came out of the Chicago Transportation Study.
Observation: Households behaved as though they had a combined
rent and transportation budget, such that, if transportation cost were
higher, they would pay lower rent .

19. THE TRADE OFF THEORY
The bid price function for the urban firm describes the prices which
the firm is willing to pay at different locations (distances from the city
center) in order to achieve a certain level of profits.
Alonso’s 3 points characterization of the bid price curve:
•Every individual or household has her own bid price curve. Others
have other curves
•Every bid price curve represents a given utility level. There is family
of bid price curves representing different utility levels, analogous to
the well-known indifference curves
• Prices represented by the bid price curve have no necessary
relations to actual prices: A bid price is hypothetical.

20. THE TRADE OFF THEORY
•Households have preferences given by a set of indifference curves.
•Different amounts of housing space could be chosen at different
locations.
•The bid-rent function would not have to be a straight line. A shift to
a higher bid-rent function for a household involves the acceptance of
a lower indifference curve
• Higher income households end up locating in the suburbs because
of the relatively lower cost of open land space there compared with
locations closer the CBD.

21. THE TRADE OFF THEORY
The Usefulness of the Bid-price concept
Rent gradient can be obtained from the bid-price curves , i.e., from
household preferences.
It predicts about variations in wage rate and the factors determining
location of non residential activities:
i) Wages are higher in the city,
ii) Commercial and industrial users will have to pay higher space
costs and wage costs in large cities
iii) Space costs and cost of labour of commercial and industrial users
will fall with distance from the city centre
Bid-price curve can be used to show that rent will reduce at a
diminishing rate with distance from the city centre.

22. THE TRADE OFF THEORY
Bid Rent Curve

23. THE TRADE OFF THEORY
The theory can explain the general variation in property values and
land values both within and between cities.
The theory is most useful in explaining the pattern of residential
location in very large cities with long travel times and high travel
costs.
In small towns this theory is not so useful as the dominant factors
may be the past pattern of development and the ownership of land,
environmental attributes, the social preference of the population,
local government based services.