After reading this article you will learn about:- 1. Meaning of Rent 2. The Ricardian Theory of Rent 3. Types of Rent.
Meaning of Rent:
The word rent can refer to any periodic payment made regularly for the hire of a good e.g. a house, a flat, a shop etc. Rent is the share of the national income that goes to the owners of land. Mineral royalties are a form of rent.
The amount of economic rent is determined by the richness of the land or mine, since the greater the value that a given amount of labour can produce, the greater the surplus from which rent can be paid.
Economic rent is in fact the difference between the yield of land and the cost of producing the yield. In common use rent means the hire price of land or building. When a person hires a house, he is said to rent it and the periodic payment is termed rent.
In ordinary sense rent is simply a price for the use of the services of a factor of production, land or land together with buildings, paid by the tenant to the owner. Rent, as the hire price of land, however also includes interest on capital.
Rent is the surplus received by any factor of production above its opportunity cost-that is, any surplus over and above what was necessary to keep that factor in its present employment. Rents can therefore be received by labour, capital or the entrepreneur, as well as by land.
The Ricardian Theory of Rent:
One of the earliest explanation of the nature of rent, and one which is still regarded as coming very near the truth, was provided by David Ricardo in the early years of the nineteenth century. Ricardo defined rent in what he called in the strict sense as that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.
Ricardo had two main intentions:
(i) Rent is a return for the use of the original and indestructible powers of the soil.
(ii) High rents are not a sign of the bounty of nature, on the contrary, they are an indication of the niggardliness of nature.
Ricardo lived at a time when high rents were causing great anxiety. He saw only too clearly that these high rents were caused by the scarcity of agricultural land and its produce and not by their abundance. It is scarcity and high prices which cause high rents, not bountiful plenty.
Rent, according to Ricardo, arises like this. If a country has an abundance of rich and fertile land, there will be no rent, for no one will be willing to pay for the use of land if there is a greater supply of it than is required for all purposes. Rich and fertile land, however is not unlimited in quantity in any country, nor is land uniform in quality.
It is because of this that rent arises, for says Ricardo, “When land of the second degree is taken into cultivation, rent immediately commences on that of the first quality and the amount of that rent will depend on the difference in the quality of these two portions of land. More fertile land will yield a greater return, and value of this excess yield over that of land at the margin of cultivation is its rent.”
Not unnaturally, perhaps, in view of his definition, Ricardo restricted rent to land. As it is defined by modern economists, rent becomes a much more useful concept, since it can apply to any of the factors of production.
Types of Rent:
1. Scarcity Rent:
Scarcity rent results from the scarcity of homogeneous land. The essential feature of pure scarcity rent is this. Whilst a rise in the prices of other factors of production will often cause an increase in their supply, a rise in rent cannot increase the supply of land.
It is the fixity of its supply which distinguishes homogeneous land and its scarcity rent from other factors of production and their prices. Scarcity rent is essentially the result of the fact that, in the real world, land is in inflexible supply.
2. Differential Rent:
The model which is assumed to discuss the problem of scarcity rent considers that land is both homogeneous and scarce. This is not, however, a very realistic model. Because all land is never of the same quality. It is reasonable to assume that a particular stretch of land will not be so fertile as the rest of that.
This type of situation leads to differential rent i.e., rent will be different on each grade of land. Differences between the fertilities of different types of lands will cause differences in their rents. Rent will be lower on the less fertile land and higher on the more fertile land. However, rent is caused solely by the fact that land is scarce.
Following Marshall, the term quasi-rent was used to describe all rents received by factors other than land. Quasi rents tend to be temporary, received by the factors concerned in the short period only until supply catches up with demand.
In Marshall’s words the supply of Machines and other appliances made by man is elastic in the long run but inelastic in the short run. They are not in fixed supply like land, so the earnings from their use cannot be called rent in the economic sense.
Marshall attached great importance to the analysis of these earnings from machines and coined a special term for them, namely Quasi-rent. The quasi-rent of a machine is its total short-run receipts less the total costs of hiring the variable factors used with it and of keeping the machine in running order in the short run.
In long run equilibrium, quasi-rent will become equal to the (constant) normal earnings of the machine. Quasi-rent, in other words, will be at its normal long run level, where it is just equal to the cost of keeping the machine in continued existence.