Rent
Rent
* Definition of Rent
* Recardian Theory of Rent
* Quasi Rent
* Modern Theory of Rent
Definition of Rent
In ordinary sense the term rent refers to the hiring charges paid to the
owner of an asset for using his right of ownership for a specific
period of time. In economics the term rent is called economic rent. It
is defined as
“That part of the payment by the tenant, who is made only for the use of land i.e. free gift of nature”.
In economics rent is mainly related to agriculture and is mainly distinguished as economic and contact rent.
Economic Rent and Contact Rent
Some times the agriculturist tenant makes the payment which consist on
capital made by the landlord such as drainages, wells etc. This part of
the payment, which consists of the interest on capital made by the
landlord, is called contact rent. Where as the part of the payment which
is made for the use of land only is called economic rent.
Rent and Transfer Earnings
The concept of the rent is also explained by the help of transfer
earnings. The amount which factor can earn in its next best paid
alternative use called transfer earning. In this sense if the factor is
earning above its transfer earnings, the surplus or excess earnings is
called economic rent.
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Recardian Theory of Rent
The British economist Devid Recardo propounded the theory of rent a century ago.
Assumptions
The Recardian theory of rent is based on the following assumptions.
1. Rent is paid to the landlord for the use of original and the indestructible power of land.
2. Rent is a differential return due to the differences in the
fertility of land as well as their locations. The more fertile land the
higher will be its rent and vice versa.
3. The Recardian theory depends on the historical order of cultivation
i.e. the more fertile land is cultivated first and such rent does not
pay rent in the beginning but as but as other grades of land come under
cultivation it begins to pay the rent.
4. The land on which the cost of production is equal to the amount it produces is a no rent land or marginal land.
Theory
The Recardian theory of rent can be stated as
“Rent is that portion of the produce of earth which is paid to the
land lord for the use of original and indestructible power of soil”.
Economic rent according to Recardo is the true surplus left after the
expenses of cultivation as represented by payment to labour, capital
and enterprise.
Criticism
Recardian theory of rent has been criticized on the following grounds.
1. Recardo’s statement that the properties of soil are
indestructible is wrong. The fertility of land often gets exhausted
when it is continuously used. However it can be increased by using
artificial manures but such fertility is considered to be temporary.
2. Statement of the theory that the superior land is
cultivated first is not always true. Actually in general the order of
cultivation is not the same as the theory says since a cultivates that
land first which is near to him.
3. Recardo assumes that the no rent land exists in a country
is also not applicable everywhere. This concept of no rent land is
merely imaginary and theoretical.
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Quasi Rent
The concept of Quasi rent was first introduced by Marshal according to
him, quasi rent is a surplus earned by investments of production other
then land. It is the income derived from appliances and machines,
which are the product of human effort. Quasi rent stands for whole of
the income, which some agents of production yield when demand for them
is suddenly increased. It is earned during a period that their supply
cannot be increased in response to increase in demand for them. Hence it
is a short period concept. It has also been defined as the excess of
total revenue earned in the short run over and above the total variable
costs.
QUASI RENT = TOTAL REVENUE – TOTAL VERIABLE COST
The concept of quasi rent can be understood with the help of an
example. At the time of independence of Pakistan, the demand for houses
increased due to sudden increase in population but the supply could not
be increased due to the scarcity of building material. The abnormal
increase in the return on capital invested in capital (building) is
quasi rent.
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Modern Theory of Rent
This theory is also known as demand and supply theory of land. It is based on the following assumptions:
1. There is always perfect competition among various cultivations.
2. The fertility of different lands is same.
3. The land is used for a particular job.
Explanation of the Theory
The theory explains the concept of rent in terms of demand and supply.
According to the theory rent is payment for the use of land. Demand
for the use of land is actually the demand for that product which is
produced on it. Demand for the land will increase with increase in
demand for that particular product. Since th supply of land is fixed
i.e. the supply cannot increase or decrease therefore the rise or fall
of rent will be entirely governed by it’s demand. Thus on the side of
demand rent of land is determined by its productivity not total
productivity, but marginal productivity. And for supply, the supply of
land in general is absolutely inelastic, as such in supply is
independent of what it earns. From the following figure it is clear that
the supply of land is fixed SS, while as demand is increasing from DD
to D’D’ and to D’’ to D’’, the rent is also increasing from RR to R’R’
and to R’’R’’.
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