Definition and Meaning of Rent:

The term 'rent' is an unfortunate one. Its meanings in Economics differ from the ordinary usage. In the every day speech, the term, rent is applied to the periodic payments made regularly for the hire of a particular asset. For example, the payments made by a tenant to the owner of a house, or factory or land on weekly, monthly, or yearly basis is a rent in the popular sense. In Economics: "The concept of rent or to be more precise 'economic rent' is used in a special sense. According to the classical economists, rent is a price of land. It is a payment made by a tenant farmer to the landlord for the use of original and Indestructible powers of the soil".

Modern Concept of Rent:

The modem economists do not use the concept of economic rent in the restricted some. They apply rent to all the factors of production which do not have a perfect elastic supply. According to them: "Economic rent is a surplus or excess over the transfer earnings". In the words of Building: "Economic rent may be defined an any payment to a unit of production which Is in excess of the minimum amount necessary to keep that factor In its present occupation".

Example:
For example, a typist is ready to work for $4600 per month in a college but he is paid $4900 per month. This is because of the fact that the market demand for the typists is greater than its supply. So long as the supply cannot be adjusted to demand the typist will continue earning a payment in excess of $4600 of the amount which is necessary to keep him in that occupation. This monthly surplus money of $300 (4900 4600 = $300) is an economic rent.

Ricardian Theory of Rent/Ricardian Model of Rent:

Definition:
The theory of economic rent was first propounded by the English Classical Economist David Ricardo (1773 -1823). David Ricardo in his book. "Principles of Political Economy and Taxation", defined rent as that: "Portion of the produce of the earth which is paid to a landlord on account of the original and indestructible powers of the soil, Ricardo in his theory of rent has emphasized that rent is a reward for the services of land which is fixed in supply. Secondly, it arises due to original qualities of land which are indestructible". (The original indestructible powers of the soil include natural soil, fertility, mineral deposits, climatic conditions etc., etc.).

Assumptions:

(i) Rent Under Extensive Cultivation. (ii) Rent Under Intensive Cultivation.

Explanation and Example of Ricardian Theory of Rent:

Rent Under Extensive Cultivation:
According to Ricardo: "All the units of land are not of the same grade. They differ in fertility and location. The application of the same amount of labor, capital and other cooperating resources give rise to difference in productivity. This difference in productivity or the surplus which arises on the superior units of land over the inferior units is an economic rent". The Ricardian theory of rent is explained by taking an example:

Schedule:
Grades of Land A B C D Yield in Quintals per Acre 50 35 20 15 Price per Quintal ($) 50 60 70 80 Total Return ($) 2500 2100 1400 1200

In the above schedule, we assume that there are four grades of land A, B, C and D in an uninhabited country. A grade land is more fertile than B grade land. B grade land is superior to C grade and so is C grade to D grade land. Following Ricardo let us assume, a batch of settlers migrate to this island. They begin cultivating A grade land which yield 50 quintals of wheat per acre. Let us suppose now that the population of that country increases and A grade land is not sufficient to meet the food requirements of the growing population. The inhabitants of that country shall then have to bring under cultivation B grade land. With the identical amounts of labor and capital. B grade land yields 35 quintals of wheat per acre. A surplus of 15 quintal of wheat {50 - 35 = 15) which arises with the same outlay on A grade land is an economic rent. B grade land being a marginal land gives no rent. When owing to the pressure of growing population and a rise in demand for food, C grade land is brought under cultivation, it yields only 20 quintals of wheat with the identical amount of labor and capital. With the cultivation of C grade land, the economic rent of A grade land is now raised to 30 quintals per acre: (50 - 20 = 30) and that of B grade land 15 quintals of wheat per acre. C grade land is a no rent land as it is cultivated at the margin. If the expenses of production on A grade of land yielding 50 quintals of wheat are $2500 and the market price of total yield on A grade land is also $2500, then A grade land only will be brought under cultivation. A grade land here is the marginal land. If the price of agricultural produce increases ($60 per quintal) and the expenses of producing wheat on B grade land are equal to the market price of the produce i.e.. $2100, then B grade of land which was hitherto neglected would be brought under cultivation. B grade land then becomes the marginal land. Similarly, D grade land will be the marginal land when it

compensates the cultivator by giving a yield of $1200, and enjoys no surplus over cost. Marginal land is thus not fixed. It varies with the changes in the price of agricultural produce. If population increase still further and the demand for food increases, then D grade land will be brought under plough. The surplus or economic rent of A grade land will go up to 35 quintals (50 - 15 = 35), of B grade 20 quintals, of C grade 5 quintals. D grade land being the marginal land yields no rent.

Diagram:
The Ricardian model is now explained with the help of a diagram:

In the figure (19.1), the various grades of land in the descending order of fertility are plotted on OX axis and yield per acre is shown on OY axis. The cultivated area due to pressure of population and the rising demand for food is pushed to D grade of land which is a marginal land. The owner of A grade of land gets a surplus, or economic rent of 35 quintals of wheat, of B, 20 quintals and on C grade, the rent is 5 quintals of wheat.

Rent Under Intensive Cultivation:

The theory of rent which has been discussed above applies to Intensive margin of cultivation. The surplus or economic rent also arises to the land cultivated intensively. This occurs due to the operation of the famous law of diminishing returns. When the land is cultivated intensively, the application of additional doses of labor and capital brings in less and less of yield. The dose whose cost just equates the value of marginal return is regarded marginal or no rent dose. The rent arises on all the infra-marginal doses. For example, the application of first unit of labor and capital to a plot of land yields 25 quintals of wheat, the 2nd dose gives 15 quintals of wheat and with third it drops down to 10 quintals only, the farmer applies only 3 doses of labor and capital as the total outlay on the third does equals its return. The rent

when measured from the third or marginal dose is 15 quintal on second dose (15 -10 = 5). The third dose is a no rent dose.

(25 - 10 = 15) on first dose and 5 quintal

Criticism on Ricardian Theory of Rent:

(i) No Original and Indestructible Power: Ricardo is of the opinion that rent is paid due to the original and indestructible powers of the soil. It is pointed out that there are no powers of the soil which are indestructible. As we go on cultivating a piece of land time and again, its fertility gradually diminishes. To this criticism, it is replied that there are properties of the soil, such as climate situation, sunshine, humidity, soil composition, etc., which are infect original and indestructible. (ii) Wrong Assumption of 'No Rent Land': Ricardo assumes the existence of no-rent land. A land which just meets the cost of cultivation. The modern economists are of the opinion that if a plot of land can be put to several uses, then it does yield rent. (iii) Rent Enters Into Price: According to Ricardo, rent does not enter into price. The modern economists are of the opinion that it does eater into price. (iv) Wrong Assumption of Perfect Competition: Ricardo is of the opinion that perfect competition prevails between the landlord and the tenant, but in the actual world, it is imperfect competition which is the order of the day. (v) All Lands are Equally Fertile: Ricardo assumes that rent arises due to difference in the fertility of the soil. But the modern economists assert that if all lands are equally fertile, even then the rent will arise. The rent can arise: (a) if the produce is not sufficient to meet the requirements of the people, and (b) due the operation of the law of diminishing returns. (vi) Historically Wrong: Carey and Roscher have criticized the orders of cultivation assumed by Ricardo. They are of the opinion that it is not necessary that A grade land will be cultivated first, even if it lies far away from the city. To this it is replied by Walker that when Ricardo uses the words 'best land' he means by it the land which is superior both in fertility and in situation. (vii) Neglect of Scarcity Principle: It is pointed out by the modem economists that the concept of rent can be easily explained with the help of the scarcity principle and so there is no need to have a separate theory of rent.

Modern Theory of Rent:

Definition and Explanation:
The modern economists like Pareto, Mrs. Joan Robinson, Boulding, Sligler, Shepherd, have tried to simplify and generalize the Ricardian theory of rent. According to them, the Ricardian theory of rent is too closely related to land. This creates on impression that rent is a peculiar earning of land only. The fact, however, is that other factors of production i.e., labor, capital and entrepreneurship may also be earning economic rent. The determination of rent, the modem economists say, can be explained in the same manner as the reward of other factors, that is by demand and supply forces.

Demand and Supply Analysis:

(A) Demand For a Factor:
The demand for a factor which may be land, labor or capital is a derived demand. Land, say for instance, is demanded for its produce. The higher the produce, the greater is the demand for land. A firm will pay

rent equal to the marginal revenue productively of land. The rent diminishes as more land is used due to the operation of law of diminishing returns. The demand curve of a factor is, therefore, negatively sloped which means more land will be used only at lower rents, other things of course remaining the same. Supply of a factor. The supply of land to a particular use (say industry) is quite elastic. It can be shifted to other uses by offering higher rent than that being earned by it now. The supply of a factor (to an industry) is, therefore, rent elastic. If higher rent is paid, the supply of a factor can be increased by withdrawing it from other uses. The supply curve of a factor (industry) slopes upward to the right.

Determination of rent. The economic rent is determined by the intersection of demand and supply curves for a factor. In this figure (19.2), the demand curve for a factor say labor in a particular industry is DD/ and the supply curve of workers is SS/. The wage rate or factor price of labor as determined by the market forces is OW. The total workers employed in a particular industry at OW wage rate is OL. The total earning of the workers employed is equal to the area OWEL. At wage rate OW, there are workers who would work, at lower pay but they are also paid at OW wage rate. Those workers whose transfer earnings are less than this wage rate will be getting economic rent. The total economic rent earned by all the intra marginal workers is equal in the area WES. The marginal worker i.e., Lth worker is not obtaining any rent or surplus.

(B) Rent is a Surplus Return:

The modern economists are also of the view that rent as a surplus can be earned by other factors also. It is not peculiar to land alone as explained by Ricardo. The modern theory of rent is that it is the difference between the actual earning of a factor unit over its transfer earnings. The transfer earnings of a factor of production is the minimum payment required for preventing that factor for transferring it to some other use. It is called the factor supply price in its present occupation. For example, a worker earns $6000 per month in a factory. In the next best employment, he can get $5000 only per month. The surplus or excess of $1000 which a worker is earning over and above the minimum payment necessary for inducting him to work in the present occupation is the economic rent.

Economic Rent Depends on the Elasticity of Supply of the Factor of Production:

The proportion of the income of a factor that consists of economic rent depends on the elasticity of supply of the factor of production which may be (i) totally inelastic supply (ii) perfectly elastic supply and (iii) less than perfectly elastic supply. (i) Perfectly elastic supply. When the supply of a factor of production is perfectly elastic, then none of its income is economic rent. Its entire income is transfer earnings.

In the Fig. 19.3, the supply curve SS/ is a horizontal line. Whatever the amount of factor demanded, the supply price remains at OS. Hence, it earns no surplus in the nature of rent. (ii) Totally inelastic supply. When the supply of a factor is totally inelastic, then its transfer earnings is zero. The entire income is economic rent.

In the fig. 19.4, the elasticity of the supply of factor of production is zero. It does not increase at all as its demand increases. The supply curve is vertical. The entire of factor income is a surplus which is shown by area ONST. (iii) Less than perfectly elastic supply. If the supply of a factor of production is neither perfectly elastic nor perfectly inelastic as illustrated in fig.19.5, then some part of the factor income is economic rent and the other part is transfer earnings.

In Fig. 19.5, the supply curve SS/ of a factor, say labor, is positively sloped. A firm must pay at least OS price to attract OL units of labor to the given use. If supply of a factor is to rise, the factor must be paid higher and higher wages to attract more units. The demand curve DD / (measuring the marginal revenue product of the labor) interests the supply curve at point R. Now at OT equilibrium price, Quantity of the Factor ON units of labor are demanded and supplied. Since all the units of the Fig. 19.5 factor up to ON are paid the market price OT, the intra marginal units earn surplus above their supply price. The marginal unit i.e., Nth is not getting any rent. Here the total income of the factor is equal to the area OTRN. It is made up of its economic rent equal to the area STR and its transfer earnings equal to the area OSRN.

Rent and Price Theory:

Old View (Controversy, Ricardo's Point of View):
There is a controversy in the Ricardian theory of rent whether rent enters into the price of the produce or not. Ricardo is of the view that rent does not form a part of the price of agricultural production. It is the result of price. As price rises, more and more units of the inferior kind of land are brought under cultivation. This enables the owner of superior kind of land to earn a differential surplus. Rent is, thus, not a price, determining factor but it is price which determines rent.

Example:

For instance, the cost of production of wheat per quintal in A, B, C and D grades of land is $30, $40, $50 and $60 respectively. Let us suppose that the price of wheat in the market is $40 per quintal. At this price only A and B grades of land will be brought under cultivation. The owner of A grade land will earn a surplus of $10 per quintal. If due to greater demand of wheat, price rises to $50 per quintal in the market, the owner of A grade land will earn $20 as rent and the owner of B $10, and the C grade land will be norent-land. If price happens to rise to $60, then D grade land will be cultivated and the rent per quintal of wheat for A, B and C grades of land will be $30, $20 and $10. Thus, we conclude, that higher the price, the higher is the rent and wee versa. In the words of Ricardo: "Corn is high, not because rent is paid, but rent is paid because corn is high". Or, in other, words, we can any that the prices of commodities are not high because the rents are high. The correct statement would be that rents are high because prices are high. Rent in brief is price determined and not price determining.

Modern View:
The modern economists, however, do not agree with the above view of Ricardo that rent does not enter into the price of land. They say that this inclusion (rent not entering into price) is valid only if we took at land from the point of view of the community as a whole; Ricardo did not consider the question of rent payment from the point of view of a single industry or in particular use. If we look at rent from the point of view of particular use, rent does become a part of price. This is evident from the concept of transfer earnings. A plot of land, as we know, has an alternative uses. It can be used for growing wheat, cotton, rice, sugar-cane, maize, etc. If it is put to one use, it cannot be used for any other purpose at the same time. We can either grow wheat or sugar-cane in it. The choice is before us. If we utilize it for growing wheat, then we will have to make payment at least equal to the amount which it would have brought when sugar-cane was to be grown in it. If the sum equal to the amount of transfer earning is not paid to the owner of sugar cane plot, then this land will not be available for growing wheat. The minimum price or payment that must be paid to the owner of plot for inducing him to make the land available for a growing of wheat is called transfer payment or transfer earning or transferring cost. Since transfer payments are part of the supply price from the point of view of an industry, therefore these enter into the cost of. production and determine the price of the product.

Concept of Quasi Rent:

Definition and Explanation:
The concept of quasi-rent owes its origin to Dr. Alfred Marshall. Dr. Marshal is of the opinion that: "It is not possible for human beings to increase the supply of land. It is fixed by Nature. If price of a produce rises, the surface of earth cannot be increased and if price falls, it cannot be decreased. But by appliance of machine which are the product of human efforts, the supply can be increased or decreased if a fairly long period of time is allowed".

"Marshall is of the view that a differential surplus which arises from a factor of production, whose supply is fixed for all times to come should be named as rent but a temporary gain which a factor or production earns due to temporary limitation of its supply should be called quasi-rent".

Example:
For instance, the demand for shaving blades suddenly goes up in Canada and the price of a packet containing 10 blades rises from $15 to $20, The entrepreneurs lured by high profits will naturally try to produce more blades. They may try to meet the demand by working the factory for 24 hours. Let us suppose, the supply is still short of demand and the price remains at $20 per packet. The new entrepreneurs attracted by high profits will establish new factories. A factory cannot be established in a day. It needs time for installing new machinery. When new plants are set up, the supply of blades will increase and the price comes down to the level of their costs of production ($15). The temporary gain which the old factories have earned during the period when new factories were not installed, is regarded as earned during the period when new factories were not installed is regarded as quasi-rent. "Quasi-rent is, thus, a temporary gain which is earned by a factor of production due to the temporary limitation of its supply".

Modern View of Quasi Rent:

The modern economists do not place land under a separate category. They are of the opinion that when all the factors of production are scarce in a relation to their demand, the rent can arise from all of them. Rent is one of the important members of a large family consisting of wages, interest and profits, or, in the words of Marshall, we can say: "Rent is the leading species of a large genus".

How does rent of Land differ from rent of; (a) Fisheries, (b) Mines and (c) Buildings?
(a) Rent of Land and Fisheries. If proper care of fisheries is taken and fishing is not done in the breeding season, then the rent of land and fisheries is very similar to each other. A fishery which is well located near the market will be in an advantageous position. Its produce will be marketed at a lesser cost than the other fisheries which are situated at some distance from the market. If the price of fish per kilo in the market is equal to the cost of operating it in the distant fisheries, then the fisheries which are situated near the market will earn a surplus. This differential gain or rent is all due to the factor of situation. If a fishery is more productive in the supply of fish than the other fisheries, then it will enjoy rent in the same way as a superior land enjoys over an inferior land. If fishing is done throughout the year, then the resources of the fisheries will be soon exhausted and the rent will be analogous to mines. (b) Rent of Land and Mines. Rent of mines stands on a different footing from rent of land. There is no doubt that mines are a part of free gift of Nature but they do not posses the quality of being indestructible. As mines are worked out, they soon get exhausted. It is not possible to gain its content by managing it as we do in the case of agricultural land. So the owner of the mines demands of reward, firstly, for the differential gain enjoyed by the mines over other mines and secondly, the compensation for the exhaustion of mine. This compensation is called "royalty". Thus, we find that the rent of land differs from mines as the owners of mines get rent proper as well as royalty.

(c) Rent of land and urban site land. Rent of land and rent of urban site do not differ fundamentally from each other. In the case of agricultural land, the fertility of the soil plays a very important part in the determination of rent. As regards urban site rent, it is situational advantage which plays the decisive role. For instance, if two houses quite similar to each other are situated at two different places, one in the heart of the city and the other in the suburb, the former will enjoy more rent than the later.

Economic Progress and Rent:

Economic progress has a close bearing on rent. Economic progress can take the form of: (i) Improvement in the means of communication and transport. (ii) Improvement in the art of cultivation. (iii) Increase in the population. (iv) Growth of civilization. Let us now examine how rent is affected by these improvements. (i) Improvement In the Means of Transport and Rent: If there is an improvement in the means of communication and transport, the agricultural products will be marketed at a cheaper cost. The rent of the land which is situated near the market will fall and the rent of the distant land will rise as they are now almost near the market as regards the marketing of products. (ii) Agricultural Improvements and Rent: An improvement in the technique of cultivation exercises powerful influence on rent from agricultural land. If better methods of cultivation are discovered and applied, the yield per acre will increase. It will result in the total increase of agricultural products. If the demand for the agricultural commodities does not increase to the same extent as the. increase in production has taken place, the price of the products will fall. Inferior grades of land which were being cultivated at the old price, will now be thrown out of cultivation. The margin of cultivation will ascend and so the rent will decrease. (iii) Growth of Population and Rent: If there is an increase in the population, the demand for agricultural products goes up. People either bring under cultivation inferior kind of land or resort to intensive cultivation. As inferior grades of land are brought under cultivation, the rent on the superior grades of land begins to increase. So, we conclude that with the growth of population, the margin of cultivation descends and the rent goes up. (iv) Growth of Cultivation and Rent. With the increase in the standard of living of the people, the demand for various kinds of agricultural products increases. The agriculturists meet the demand by bringing the inferior grades of land under cultivation. As inferior grades of land are brought under plough, the rent of the superior grades of land goes up.