Theory Of Rent

2. 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"
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.
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".

3. 1. Ricardian Theory of Rent
2. Modern Theory of Factor
Pricing Under Perfect
Competition
3. Quasi Rent

4. Ricardian Theory of Rent
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 nature soil,
fertility, mineral deposits, climatic conditions etc.,
etc.).

5. Assumptions:
(i) Rent Under Extensive Cultivation.
(ii) Rent Under Intensive Cultivation.

6. A
25
20
B
20
15 15
C
15
10 10 10
D
10
5 5 5 5
E
5

7. You can see in the above table that there are
five kinds of land .
First one is very fertile land so it having
highest rent
2nd is inferior land hence having less rent
3rd one inferior than 1st and 2nd land so it has
less rent than previous two.
4th Land is more inferior than previous but
still acquiring rent
The last land is most inferior land so it is
earning no rent.

8. 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.

9. Limitation of Ricardian Theory of Rent:
(i) Original and Indestructible Power
(ii) Wrong Assumption of 'No Rent
Land’
(iii) Rent Enters Into Price
(iv) Wrong Assumption of Perfect
Competition
(v) All Lands are Equally Fertile
(vi) Historically Wrong
(vii) Neglect of Scarcity Principle

10. Quasi Rent
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".

11. Modern Theory of Rent:
Modern theory of rent is an amplified and modified
version of Ricardian theory of Rent. It was first of all
discussed by J.S. Mill and after that developed by
economists like Jevons, Pareto, Marshall, Joan
Robinson etc.
According to modern theory, economic rent is a
surplus which is not peculiar to land alone. It can be
a part of income of labour, capital, entrepreneur.
According to modern version rent is a surplus which
arises due to difference between actual earning and
transfer earning.
Rent = Actual Earning-Transfer Earning.

12. What is Transfer Earning?
When we transfer one factor from one
use to another, we have to sacrifice the
income earned by it from its earlier
use. Sacrifice of earning is called
transfer earning.
In short what a person, piece of land
or capital can earn in the next best
alternative use is known as transfer
earnings.

13. Features of Modern Theory of Rent:
The major features of the modern
theory of rent are as under:
1. Rent can be a part of the income of all
factors of production.
2. Amount of rent depends upon the
difference between actual earning and
transfer earning.
3. Rent arises when supply of the factor
is either perfectly inelastic or less elastic.

14. Why Rent Arises:
According to modern theory, rent arises
due to scarcity of land. Supply of other
factors like labour, capital etc. can also be
scare in relation to demand. Therefore,
income earned by these factors in excess
of their minimum income is called
economic rent.

15. When Supply of factor is Perfectly
inelastic whole income will be
transfer income no actual income and
whole income is considered as a rent.
If supply of factor is perfectly elastic
whole income is considered as atual
income and no Rent.
Supply is Less than Perfectly Elastic:
if supply of factor is less than perfect
elastic hen the Supply is Less than
Perfectly Elastic: then rent is
determined by forces of demand and
supply of a factor.