What is rent?
Rent: It means reward paid for the use of land; it is received by the land-lord (landowner) and paid by the user of land (tenant). Rent may be-
1) Contract Rent 2) Economic Rent
1) Contract Rent: It refers to the total amount of money paid for the use of land.
2) Economic Rent: It is the part of total payment which is made for the use of land; it can be estimated as follow.
a) Economic Rent: Contract Rent – Interest on the capital invested suppose a tenant paying Rs.20,000.00 per year as contract rent but the interest on capital invested is Rs.3000.00 per year, the remaining Rs.17000.00 (Rs.20,000-3000) is being for the use of land, economic rent.
b) Economic Rent: Present actual earning – Transfer earnings. Here transfer earnings represent the amount which a factor can earn in its next best alternative use. Suppose a piece of land yields in its present use Rs.5000.00 in a year and suppose further that if it is transfer to its next best use, it will yield Rs.4000.00 In its present use Rs.1000.00 (Rs.5000-4000) more than in its next best use. This sum of Rs.1000.00 is surplus is economic rent. Hence Economic rent means surplus or excess over transfer earnings.
Recardian Theory of Rent: The theory of rent was put forth by the Economist, Divid Recardo. According to the Recardian theory of Rent, rent is differential surplus and arises from the fact that land possesses certain popularities as a factor of production. It is limited area and its fertility varies, besides, its situation is fixed, thus rent results because
a) Fertility is more or less fixed in nature
b) The stock of land is fixed and can not be increased.
Thus, Recardo defines rent as that portion of the produce of the earth which is paid to the landlord for the original and indestructible powers of the soil. “This has been illustrated as under”.
1) Rent in Extensive Cultivation: Let us suppose that there are different qualities of land say ‘A’, ‘B’, ‘C’ and ‘D’ grade depending upon fertility. ‘A’ is most fertile land and yields 35 quintals of wheat while the ‘B’ is inferior than ‘A’ yielding 30 Qts. of wheat. Further, ‘C’ is still inferior who yields 25 Qts while ‘D’ is least fertile yielding 20 Qts of wheat which Record describes as marginal land.
Ricardo begins with a group of new settlers in a new country, the group of people will settle down in ‘A’ part of the country which is most fertile land. They will start to cultivate land. At this stage no rent is paid because ample land of first quality is available, But as the population increases and the produce from the “A” grade land is insufficient for increasing population, Naturally ‘B’ grade land will have also to be taken for cultivation. Since, this land is inferior it yields less than the land i.e. 30 quintals of wheat per plot as compared with 35 Qts of ‘A’ with the same expenditure of labour and capital. Naturally ‘A’ grade land acquires a greater value as compared with ‘B’ now a tenant will be prepared to pay up to 5 quintal of wheat in order to get a plot in the ‘A’ zone or take ‘B’ grade land free of charge. Thus, the rent arises for ‘A’ grade land which is equal to the difference between yields of ‘A’ and ‘B’ grade lands. That is 35 Qtls-30 Qts 5 Qts of wheat. Thus Ricardo considered ‘Rent’ as a surplus accruing to superior land over inferior land called “marginal land” Thus such shifting of population is occurred further on ‘C’ and ‘D’ grade lands the economic rent will still increased as indicated in the following table.
|Grade of Land|
Production ( Qts)
Value of Produce @ Rs 1000/ Qts
Cost of production
Surplus over ‘D’ (Qts)
Economic Rent (Rs.)
2) Rent in intensive cultivation: Suppose, the settlers resided in ‘A’ grade land realize that there is another way too of increasing the produce by applying more labour and capital to superior lands (i.e. intensive cultivation). This is done but it is seen that the law of diminishing returns sets in now consider that ‘A’ ‘B’, ‘C’ and ‘D’ are the different doses of labour and capital (not grades) applied to the same grade of land The first dose ‘A’ yields 35 Qts of wheat, the second dose of labour and capital — ‘B’ applied on the some plot will almost definitely give us less than the first, suppose 30 Qts of wheat. So we have the choice of either taking new plots or cultivating the same lands more intensively. If we adopt the latter course, the first unit of labour and capital (does A) will be yielding a surplus over the second unit. (dose- ‘B’) which produces, just enough to cover the expenses. This Surplus again is rent. Here 5 Qts surplus and it is economic rent. As more and more units of labour and capital are applied, the return per unit will go on falling.
The rent arises from extensive cultivation and intensive cultivation together has been depicted diagrammatically as under. The shaded area represents rent and the ‘D’ land/dose yields which just cover its expenses and no more. It is described as “marginal” or ‘No—Rent land”.
3) Rent Due to Differential advantages: Suppose, further after some years market in ‘A’ zone and Railway in ‘B’ zones have been started. As a result, when produce is to be disposed off the market cost in ‘A’ zone and transport charges in ‘B’ zone will be least or negligible compared to that of in ‘C’ and ‘D’ zone. Thus the plots located in ‘A’ & ‘B’ zone will be advantageous. The better situated plots, which have to bear less market transport charges, will enjoy a surplus over the distant ones (i.e. ‘C’ & ‘D’ zones. This surplus will be another cause of rent.
Hence, economic rent is a surplus which arises on account of natural differential advantages, whether of fertility or situation possessed by the land in question over marginal land.
4) Scarcity Rent: Suppose, all types of lands cultivated extensively and intensively too. But the price rises still further under the pressure of demand. Population is increased and no more land is available. Prices of agril produce go up and therefore, incomes from land go up. Hence, all land, including no-rent ‘D’ quality land begins to get surplus above expenses. This surplus above costs in the ‘D’ quality land, (our previous no rent land) is “scarcity rent”.
Summing up, the fertility, situation and limited total stock these qualities of land which are original and permanents give rise to rent.
The Recardian theory of Bent has been criticized on following points.
Fertility of land is not original. The present productive capacity of land is the result of human efforts, like use of manures and improved technology.
The idea of indestructibility is objected. Area of land is everlasting but not fertility. Fertility can be destructed due to continuous cultivation.
The concept of marginal land Said to he imaginary.