The location of agricultural activities
Thunen (1826) sought to explain the pattern of agricultural activities surrounding cities in pre-industrial Germany. Each location in space is characterized by various factors such as soil conditions, relief, geographical position, and the like.
Both land rent and land use vary across locations depending on these characteristics. Among them, the most important for location theorists is the transport-cost differential over space. Whereas Ricardo concentrated on fertility differences in his explanation of the land rent, Thunen constructed a theory focusing on the transport-cost differentials across locations. To this end, he used a very simple and elegant setting in which space is represented by a plain on which land is homogeneous in all respects except for a market town in which all transactions regarding agricultural goods must occur. The location of the market town is supposed to be given and the reasons for its existence are left outside of the analysis. By allocating an acre of land near the town to some crop, the costs of delivering all other crops are indirectly affected as they are forced to be grown farther away. Hence, determining which crops to grow where is not an easy task. Though simple, this setting is rich enough to show how a competitive land market can structure the use of land across space by perfectly divisible activities.The principles underlying his model are so general that Thunen can be considered the founder of marginalism (Samuelson, 1983). In addition, the importance of Thunen’s analysis for the development of location theory is twofold in that space is considered as both an economic good and as the substratum for economic activities. In his framework, the allocation of land to the different economic activities is shown to emerge as the equilibrium outcome of a perfectly competitive land market. The assumption of a competitive land market can be justified on the ground that land in a small neighborhood of any location belonging to a continuous space is highly substitutable, thus making the competitive process for land very fierce.
Very ingeniously, Thunen imagined a process in which each farmer makes an offer based on the surplus he can generate by using one unit of land available at any particular location. This has led him and his successors to develop the concept of bid rent function, which describes the maximum price an agent is willing to pay to occupy each location.This approach is probably what makes Thunen’s analysis of land use so original. In a sense, it rests on the idea that land at a particular location corresponds to a single commodity whose price cannot be obtained by the textbook interplay between a large number of sellers and buyers. Specifically, land at any point is allocated to an activity according to a bidding process in which the producer offering the highest bid secures the corresponding lot. A farmer’s bid depends on the transportability of his output and the amount of land needed to produce one unit of the good. Land being allocated to the highest bidder, economic activities are distributed according to the famous pattern of concentric rings, each of them being specialized in one crop. The land rent decreases with distance from the market town at a rate which is constant in each ring and decreasing from one ring to the next.
The model can be closed by assuming that all agricultural activities use land and labor while a manufactured good is produced in town by using labor alone, typically under the form of craftsmanship. Such a specialization of tasks reflects the traditional division of labor between cities and the countryside. Workers are perfectly mobile and landlords reside in town; they all have identical preferences. The solution to such a general spatial equilibrium model, in which the real wage common to all workers as well as the prices of agricultural and manufactured goods are endogenous, has been obtained by Samuelson (1983).
Yet, despite his monumental contribution to economic thought, Thunen’s ideas languished for several decades. Blaug (1985: ch.
14) attributes the subject’s neglect to Thunen’s cumbersome style. Indeed, one had to wait for Launhardt (1885 [1993]: ch. 30) to have a formal treatment of his ideas in the special case of two crops. The first model with n crops is due to Dunn (1954), while Schweizer and Varaiya (1976) have provided the complete solution to the general model with a Leontief technology in which goods may be used both in the final and intermediate sectors. Whatever their use, goods are either shipped toward the marketplace or used locally. It was not until Beckmann (1972a) that the Thunen model was extended to cope with a neoclassical production function.It took even more time to explain how and when a market town, which imports agricultural goods from and exports manufactured goods to its rural hinterland, may emerge as an equilibrium outcome. More precisely, the key question that has been at the heart of economic geography for decades may be stated as follows: what binds together manufacturing firms and workers within the city? Using the new economic geography framework discussed below, Fujita and Krugman (1995) have identified sufficient conditions for a monocentric economy to emerge as an equilibrium outcome. Specifically, when (1) the transport cost of the agricultural good is low relative to that of the manufactured good and (2) when the total population is small enough, all manufacturing firms, which operate under increasing returns, agglomerate within a single district together with their workers, while farmers are dispersed across the agricultural hinterland. When one of these two conditions does not hold, shipping goods from and to a single market town is so costly that several cities emerge and generate an urban system.