According to tradition, rent arises only from land but according to modern economists, it arises not only from land but arises from all factors of production i.e. labor, capital and organization too. There are 2 concepts of rent. They are
The contract rent is the amount paid by the user to owner of any factor of production like land per unit of time for the use of the factor of production. It is determined by the user and owner themselves in the contract. It is always positive. During the contact the owner and user may have different terms of contract. The contact rent is usually paid per unit of time and it is revised periodically. For example if a business man takes 2 ropani of land from a farmer paying Rs 50000 per year to build a market center then Rs 50000 is contract rent.
The difference between total incomes from the use of factor of production hired and contract rent or opportunity cost is called economic rent. It is also defined as excess earning from the use of factor of production over the contract rent.
Economic rent = total earning- contract rent or opportunity cost
It can be negative, positive or zero
If total earning > contract rent, economic rent is +ve
If total earning < contract rent, economic rent is -ve
If total earning = contract rent, economic rent is 0
- Quasi rent: The rent that occurs in the short run and disappears in the long run is called quasi rent. This type of rent arises mainly because of scarcity of the factors of production. The scarcity is caused by loss of skill, knowledge, technology etc.
Ricardian theory of rent
According to David Ricardo, rent is portion of produce of earth paid to the landlord for the use of original and indestructible power of soil. It means the rent is paid by the user to the owner of land. It is paid for the use of fertility of soil. Fertility of soil is naturally determined and not changeable. Rent is directly proportional to fertility of soil. However, the least fertile land used for cultivation has no rent. The land is called marginal land.
- Rent arises only from land
- Land is used for agricultural (maize) production
- Agricultural production starts from the most fertile land and expands to the least fertile land
- Supply of land is limited and fixed by nature. It can’t be created and destroyed
- Fertility differs from place to place and rent is directly related to fertility
According to David Ricardo, the people firstly choose most fertile land for cultivation. If such type of land is already occupied they expand production to the less fertile land. Rent arises only due to scarcity of land. It can be explained with the help of table and figure as following
|Type of land||Harvesting (per acre)||Rent (per acre)|
|A||100 tons||100-40=60 tons|
|B||80 toms||80-40=40 tons|
|C||60 tons||60-40=20 tons|
|D||40 tons||40-40=0 tons|
Let there be an island inhabited with 4 types of land A,B,C and D. the harvesting per acre from the types of land are 100, 80, 60 and 40 tons respectively, if 1st group of people go to the island, they choose type a land. Since the land isn’t occupied by other people they obtain it free of cost. If 2nd group of people go to the land and find type A land already occupied they either choose type B land free of cost of hire the Type A land paying 20 tons per acre rent. If 3rd group of people go to the land and find type A land and type B already occupied they either choose type C land free of cost of hire the Type B land paying 20 tons per acre rent or type A land paying 40 tons per acre rent. If 4th group of people go to the land and find type A land and type B and type C land already occupied they either choose type D land free of cost of hire the Type C land paying 20 tons per acre rent or type B land paying 40 tons per acre rent or type A land paying 60 tons per acre rent. In this way, rent goes on increasing with the expansion of agricultural production from most fertile land top least fertile land.
- Land is used for trade, manufacture, recreation, animal husbandry too
- Fertility changes from time to time. Fertility can be increased by using fertilizers and irrigation too
- Cultivation is not always started from most fertile land. Land is chosen with respect to location, physical facilities and so on
- Rent is determined by supple and demand of land too not only by fertility.
- Marginal land too has the rent
- Rent arises from all factors of production