Ricardian Theory of Rent

1. RICARDIAN THEORY OF RENT

2. DR. LAXMI NARAYAN YADAV ASSISTANT PROFESSOR OF ECONOMICS GOVT. P.G. COLLEGE MAHENDERGARH E-mail: [email protected]

3. DEFINITION Classical Definition David Ricardo: Rent is that portion of the produce of the earth which is paid to the land lord for the use of original and indestructible powers of the soil. Carver: Rent is the price paid for the use of land. Anatol Murad : Rent is that portion of the landlords income which is attributable to his ownership of land

4. DEFINITION Modern Definition Boulding: Economic rent may be defined as payment made to a factor of production in excess of the minimum amount necessary to keep the factor in its present occupation. In modern economic usage , rent is represented as the difference between the total return to a factor of production (land, labour, or capital) and its supply price —that is, the minimum amount necessary to attain its services.

5. TYPES OF RENT 1. ECONOMIC RENT : Economic rent may be defined as payment made to a factor of production in excess of the minimum amount necessary to keep the factor in its present occupation . 2. GROSS RENT: It is the rent which is paid for the services of land and capital invested on it. It includes the following : (a) Payment for the use of land (b) Interest on capital invested on it (c) Wages for the services of land lord for supervising the investment in land. 3. CONTRACTUAL RENT: It is the payment made to the land lord by tenants on the basis of some contract which may be verbal or written. It may be more or less than the economic rent.

6. TYPES OF RENT 4. SCRACITY RENT: It applies to all the factors of production whose supply is less elastic. Scarcity rent arises due to the scarcity of factors of production. 5. DIFFERENTIAL OR SITUATION RENT: It refers to the rent arises due to the difference in the fertility of land. This type of rent arises under extensive cultivation. The surplus enjoyed by more fertile land over and above the less fertile land is known as differential rent. 6. QUASI RENT: According to Marshall quasi rent is the surplus earned by man made factors of production whose supply is inelastic or fixed in the short run but elastic in the long run.

7. THEORIES OF RENT Various economists have proposed different theories for the origin of rent. Prominent among the theories of rent are: Ricardian Theory of Rent Modern Theory of Rent

8. Classical Theory of Rent or Ricardian Theory of Rent 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 differential rent. The classical theory of rent in the form presented and elaborated by David Ricardo has become more popular, though the ideas of all of them concerning the land rent are fundamentally same.

9. Ricardian Theory of Rent David Ricardo, a British economist, defined rent as , the 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. Ricardian rent is also known as pure rent. The true economic rent is only a payment for the use of land. It excludes interest on landlord’s investment.

10. Assumptions of Ricardian Theory of Rent The supply of land is fixed and the existing quantity of land gifted by nature cannot be increased or decreased. Another assumption is that original powers such as fertility of land are gifted by God and are not due to human efforts of any type. Land is a non-perishable factor of production. The powers/qualities of land cannot be destroyed and the fertility of land never diminishes. Land has only one use i.e. Cultivation. There are no alternative uses of land.

11. Assumptions of Ricardian Theory of Rent Different lands have different fertility levels. Utilization of land for cultivation is done based on the order of fertility of land. Most fertile land is cultivated first before using the next grade land. Law of diminishing returns or increasing costs operates in agriculture. Assumption of perfect competition is also made. Ricardo assumed the existence of margin land which is a 'no rent land'. It could be understood as the grade of land after which no land is used.

12. Explanation of Ricardian Theory The quantity of land is limited, and so is its productiveness, and it is not uniform in quality. The amount of rent is determined by the degree of the differences in productivities of land.  If the superior land will not support the population, recourse must be made to inferior lands and the produce is, thus, raised at different costs. The differential advantage of the superior land over the inferior gives rise to Economic Rent.

13. Determination of Rent According to Ricardo, rent can be determined under two situations: Extensive Cultivation: It refers to the system of cultivation wherein more land is used to increase production. Intensive Cultivation:   It refers to the system of cultivation where large amounts of labour and  capital are used in same piece of land for increasing production

14. Rent in 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 ".

15. Rent in Extensive Cultivation Let us assume that there are four types of land, classified based on its fertility, viz., A, B, C and D in descending order of their fertility. A grade of land will be cultivated first. With particular amount of labour and capital, let us assume that it yield 60 quintal of corn per acre Now when A grade of land exhausted then B grade of land will be cultivated. Now With same amount of labour and capital, let us assume that it yield 50 quintal of corn per acre. Now as user of A grade land enjoy surplus of 60-50 = 10 quintals of corn. Hence they must pay rent equal to 10 quintals per hectare on this land.

16. Rent in Extensive Cultivation Grades of Land Yield per Acre RENT A 60 60 - 20 = 40 B 50 50 – 20 = 30 C 35 35 – 20 =15 D 20 20 – 20 = 00 Same way when B grade of land is exhausted then C grade of land will be cultivated and now it will be marginal land and differential rent would occur to A grade and B grade land. This can be seen from table given below:

17. Rent in Extensive Cultivation Grades of Land Yield per Acre RENT A 60 60-20=40 B 50 50-20=30 C 35 35-20=15 D 20 20-20=00 A Grade of Land Yield in Quintals Per Hectare 10 20 30 40 50 60 B C D Rent on A Grade Land =60-20= 40 Rent on B Grade Land =50-20= 30 Rent on C Grade Land =35-20= 15 Marginal Land

18. Rent in Extensive Cultivation Grades of Land Yield in Quintals per Acre RENT A 60 60-20=40 B 50 50-20=30 C 35 35-20=15 D 20 20-20=00 A Grade of Land Yield in Quintals Per Hectare 10 20 30 40 50 60 B C D Total Rent in Economy

19. Rent in Extensive Cultivation O P D S E Output O MC AC F D Grade A Grade O MC AC F P Q R S O MC AC G B Grade Rent can also be viewed as the difference between Average Revenue(AR) and Average Cost(AC) Rent = Price(AR) - AC

20. Rent in Intensive 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.

21. Rent in Intensive Cultivation Combination of Labour and Capital Yield per Acre RENT A 60 60-20=40 B 50 50-20=30 C 35 35-20=15 D 20 20-20=00 F or example, the application of A unit of labor and capital to a plot of land yields 60 quintals of wheat, the B dose gives 50 quintals of wheat and with C it drops down to 35 quintals and for D 20 quintals only. The rent when measured from the D or marginal dose is 40 quintal (60 - 20 = 40) on A dose and 30 on B dose, 15 on C dose and the D dose is a no rent dose.

22. Rent in Intensive Cultivation A Grade of Land Yield in Quintals Per Hectare 10 20 30 40 50 60 B C D Rent on combination A =60-20= 40 Marginal Input Combination Rent on combination B 60-20= 40 Rent on combination C 60-20= 40

23. Criticism of Ricardian Theory No Original and Indestructible Power Wrong Assumption of 'No Rent Land' Rent Enters Into Price Wrong Assumption of Perfect Competition All Lands are Equally Fertile Historically Wrong   Neglect of Scarcity Principle Rent is not only for land Difficulty in Measurement of Productivity only due to Original Fertility