Central Place Theory

Under the broad aegis of economic geography, central place theory attempts to offer some explanation as to why economic goods and services are offered only in some locations and not homogeneously distributed across space. The basic essence of the theory suggests that a spatial economy emerges from the tradeoff between the economies of scale that sellers face while producing goods and the transportation costs that consumers must absorb when purchasing goods, as noted by Masahisa Fujita, Paul Krugman, and Anthony J. Venables in 1999.

As an introduction to the basic concepts within the theory, imagine a hypothetical, topologically neutral plain uniformly inhabited by wheat farmers. One of the farmers decides to produce beer and sell the product to other farmers. The neighboring farmers decide that traveling to buy the beer is more costeffective than producing it themselves. But, for the neighbors of the neighbors, the time away from the farm and the cost of traveling some distance, x, outweigh the cost of producing their own beer. So, beer is produced in a “central place,” as some farmers choose to enter the beerproducing market and serve other farmers who do not; furthermore, there is a spatial uniqueness as to who chooses which option, depending primarily on the price of beer.

The origins of central place theory (and location theory more generally) come from a long tradition of German intellectual thought. Its roots began in the 1850s, but because of the language barrier, location theory did not enter the American discourse until Walter Isard began his writings a century later. Johann von Thünen is considered the father of the field with his book, The Isolated State, in which he articulated a model analyzing rent differentials (what has become known as bidrent analysis) that accounted for the different types of agricultural land uses around a monocentric city (von Thünen's work was revisited in the 1960s by William Alonso, Edwin Mills, and R. Muth, who replaced farmers with commuters and the central city with the central business district). This body of work essentially became known as the New Urban Economics.

Refinements to central place theory itself came from Walter Christaller's book, Central Places in Southern Germany (published in German in 1933), in which he presented evidence that the “laws” governing the number, sizes, and distribution of towns in space emerge into a hierarchical urban landscape. To begin his analysis, Christaller defined an inner and outer range of an economic good. The inner range consisted of the minimum radius from a location that if the entire population within the ring purchased the good, the costs of production would equal the revenues. The outer range of any good or service was the farthest distance from the central place that buyers would be willing to travel. If the outer and inner ranges were not equal, the difference between the two rings would represent the potential profit for the good. The relative [Page 128]sizes of each range would determine the number and rank of central places within a region. For example, if the population was equally distributed around a central place and the inner range was very low compared to the outer range, the central good would be offered at another central place located nearby. The potential profit of the good (measured by the difference between the two ranges) would induce people in nearby central places to provide the good. If the two ranges were roughly equal, the central good could only be offered profitably at precisely that central place. Of course, if the inner range exceeded the outer range, the good would yield negative profits and not be offered at all.

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