Rent Modern Theory
Modern economists have tried to modify and amplify the Ricardian theory of rent. The gist of their views on the theory of rent on the following propositions:
(a) Rent arises due to scarcity of land.
(b) Rent is a generalized surplus- earned by all factors.
(c) Rent as a surplus earned by a factor is measured with reference to transfer earnings of the factor in its prevailing employments.
I. Scarcity Rent
In the ricardian analysis rent is differential surplus enjoyed by superior lands over inferior lands. According to modern theorists rent arises because of the inelasticity of the supply of land and therefore it can be earned by any factor of productivity. In other words it is explained by the interaction of demand and supply of land.
Let us assume that all land is equally fertile and there is no locational or other advantage i.e. all lands is homogeneous. If the demand for that land is les than its total supply there would be no rent.
If the entire has to be given for cultivation there will be no rent. Fig. shows increase in demand for land say due to increase in population. Since the supply of land cannot be increased the farmers intended to cultivate will be ready to pay rent will arise. Shaded area in fig. shows the total amount of rent. Thus it is due to scarcity of land that the rent element arises.
We have assumed above that land is of one quality. If the land is of different qualities then each quality will have a separate demand curve. Different qualities will then command different rents. The modern theory thus explains differential rents too. Marshell therefore states that, “in a sense all rents are scarcity rents and all rents are differential rents.”
II. Generalised surplus:
Though Ricardo associates the term rent with rent but any factor will yield rent if its supply is inelastic in relation to its demand. The only difference is that while in the case of land this inelasticity is permanent, in the case of other factors it is temporary.
Rent is a surplus over the minimum supply price of the factor in question. In other words the minimum supply price represents the minimum reward which the factor has to given to induce it to be at work this surplus represents the rent of the factor.
In short when defined as a surplus earning of a factor in excess of its supply price or the minimum necessary payment to attract it into a particular use becomes a generalised surplus. The amount of rent earned depends on the relative degree of inelasticity of supply of the factor concerned to its demand. The greater the degree of inelasticity of supply larger the surplus accures to the factor’s earning in the form of economic rent.
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The concept of quasi rent was introduced in economic theory by Marshall’s concept of quasi rent is the extension of the Ricardian concept of rent to the short run earnings of the capital equipment which are in inelastic supply in the short run. The distinguishing characteristic of land in fact that its supply is perfectly inelastic, changes in its price and therefore its earnings depend mainly upon the demand for it. But, in the short run, the fixed capital equipment such as machinery is likewise perfectly inelastic in supply and cost of its production is not relevant once it has been produced. During the short period, the earnings of specialized capital equipment depend mainly upon demand conditions and are thus similar to land rent and have therefore been called rent by Marshall. Since the capital equipment is not permanently in fixed supply like land and instead their supply is very much elastic in the long run, Marshall preferred to call their earnings in the short period as Quasi rent rather rent.
The quasi rent is only temporary surplus which is joined by the owner of the capital equipment in the short run due to the increase in demand for it and thus this will disappear in the long run due to the decrease in the supply in the capital equipment in response to the increase demand. In the short run, specialized machinery has no alternative use and therefore its supply will remain fixed in the short run even if its earnings fall to zero. Therefore, the whole of the earnings of the capital equipment or short run are surplus over transfer earnings and therefore the machinery in the maintenance cost are required to be represented rent. It may, however, be pointed out that some maintenance costs are required to be incurred in the short run to keep the machinery in the running order. Therefore, more precisely, the quasi rent may be defined as the short run earnings of a machine minus the short run cost of keeping it in running order.
There is reason to believe that quasi rent will be generally earned in the short run by the capital equipment like machinery, building etc. this is because, however keen the competition between entrepreneurs may be, the supply of capital equipment cannot be increased in the short run.
Consequently, when very high earnings are being made from capital equipments they will not be competed away in the short run. But in the long run the position regarding the supply of capital equipment is quite different. Capital equipment are manmade instruments of production and therefore their supply can be increased demand for them. Thus, as a result of the increase in the long run to meet the increased demand for earnings will be competed away. In the long run, therefore, the competitive equilibrium is reached when the earnings from the capital equipment are just sufficient to maintain them in running order and provide only normal profits to entrepreneur. Thus in the long run no surplus over cost of production is earned by the machines. Therefore, quasi rent will disappear in the long run competitive equilibrium. Professor Stonier and Hague rightly remark, “the supply of machines is fixed in the short whether they are paid much money or little so they earn a kind of rent. In the long run this rent disappears for it is not a true rent, but only an ephemeral reward-a ‘quasi rent’.
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Rent Ricardian Theory
The Ricardian theory of rent follows from the views of classical writers about the operation of law of diminishing returns in agriculture. Classical authors, West, Torrents, Malthus and Ricardo, each of them independently formulated the theory of differentiated rent. However, the classical theory of rent in the form presented and elaborated by David Ricardo has become more popular, though the ideas of all over concerning the rent are fundamentally same. Ricardo gave credit to the West and Malthus as his forerunner in the development of the theory of rent.
Ricardo defined rent as follows: rent is that portion of the produce of earth which is paid to the landlord for the use of the original and indestructible powers of soil. It should be noticed that land rent, according to Ricardian definition, is a payment for the use of only land and is different from contractual rent which includes the return on capital investment made by the landlord in the form of hedges, drains, wells and the like. When return on the capital is the price for use of only land or “the original and indestructible powers of the soil.”
Assumptions of Ricardian theory
It will gently help in the understanding of the Ricardian theory of rent determination, if we clearly state the various assumptions made by him. Firstly, Ricardo considers the supply fixed. No amount of the viewpoint of the whole society and takes the quantity of land as completely fixed. Thus the total supply of higher price for the use of land cans forth an increased supply of it. Secondly, it does not take into account the various alternative uses to which land can be put. He assumed the land to be completely specific to one growing a single composite crop corn. Thus land has taken to be completely used for growing corn or alternatively it is left to be idle. There are only two alternative used of land: its use of growing of corn or no use at all. Thus he takes the transfer earnings of land as zero. No land owner would like to leave the land idle and therefore every land owner will be would prepared to give it for any rent however little it may be provided that perfect competition prevails.
Thirdly, he assumes that land differs in quality. There are various grades of land, differing from each other in respect of fertility and location. Some pieces of land are more fertile than others and, as compared to others, some are more well located or near to the markets centres.
Fourthly, he assumes that there is perfect competition in the market for land. In other words, there are many land owners who are to give their land on rent and there are many farmers who are to get land on rent for the purpose growing corn. Further each individual land owner and farmer has no influence over rent, the price for the use of land.
Given the above assumptions, according to the Ricardian theory, rent arises due to two reasons. Firstly, if land is homogeneous, I.e. of uniforms quality and same location, the society of land relative to demand will give rise to rent.