Rent

. According to them, the minimum payment required to retain the factors in the same job is transfer earning. Whatever be excess over the transfer earning due to a scarcity of the factors are the economic rent.

In the ordinary sense, the term rent is used in a wide sense. Rent is the price of the services or use of the land. E.g. rent of a house, a machine, a car, etc. But in economics, it refers to the price paid for the uses/services of land and other free gifts of nature. It is also called Economic Surplus because it emerges without any effort on the part of the landlord.

“Rent is the price paid for the use of land.” –Prof. Carver

Concept of Economic Rent and Contract Rent

• Economic Rent

Economic rent is the minimum amount of money that an owner of land, labor or capital must receive in order to let someone else use that land, labor or capital. In economics, the rent under discussion is always the economic rent. It is defined on the basis of the minimum amount of return that the owner of the factors excepts from its use.

According to the classical economists, economic rent is that payment which is made for the use of land alone. It is determined by the fertility of the land. It is also called net rent. Modern economist uses the term rent as payment made on land and free gift of nature which are scarce in the short run. Many factors earn some income over and above their minimum earning in the short period which is rent.

Economic rent is the positive difference between the actual payment made for a factor of production (such as land, labor or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity.

• Contract Rent

It is the total lease amount which tenant is ready to pay the property as per their agreement. It includes the minimum opportunity cost of the owner along with all the other payments like tax, insurance, mainta\enance, utilities and other service charges which otherwise are paid by all owner.The tenant pays the amount as specified in the written agreement. It is also called gross rent.

Contract rent refers to that rent which is agreed upon between the landowner and the user of the land. It is the payment done according to the contract to the landlord. It is determined by the forces of demand and supply of assets in the market. In economic, it includes the interest on the capital invested and labor charges wages.

Contract Rent means the total rent that is or is anticipated to be, specified in the rental contract as payable by the tenant to the owner for rental of a dwelling unit, including fees or charges for management and maintenance services and those utility charges that are included in the rental contract. In determining contract rent, contract rent is not decreased by any rent concessions.

Ricardian Theory of Rent

The classical theory of rent was discussed by David Ricardo in his book ‘The principles of political economy and taxation’ published in 1817.

According to David Ricardo, “Rent is 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.”

In brief, rent means a payment for the use of land only and it is different from contractual rent which includes the returns on capital investment made by the landlord in the form of hedges, drains, wells and the like.

Assumptions:

Ricardian Theory of rent is based on certain assumptions which are as follows:

1. The land has no alternative use as it is used only for farming.
2. Fertility of land differs from land to land so, some pieces of land are more fertile while comparing.
3. Law of diminishing returns applied in agriculture. Therefore, the output will not increase at the same rate at which labor and capital have been increased.
4. The population of the country rises continuously in geometrical progression.
5. The Ricardian theory of rent is based upon a long term.
6. The Ricardian theory assumes the existence of no-rent land which does not enjoy any rent.
7. The Ricardian theory assumes that the supply of superior grade of land is limited.
8. The Ricardian theory rests upon the fundamental assumption that land possesses some original and indestructible powers.
9. The theory assumes the existence of perfect competition in the market.
10. The theory assumes that the most fertile and most favorably situated land will be first cultivated.

Statement of the Theory

According to Ricardo, in a civilization when there is less population, the food requirements can be met by the cultivation at only the superior grade land. But as the population increases people will be forced to take up the cultivation of second grade or less fertile pieces of land. Similarly, as the number of people increase the grade of the land decreases for the cultivation of food production.

This can be explained with the help of the following table with certain example:

From the table, The first-grade land, being the most fertile, produces 40 kg, the second grade produces 30 kg, the third-grade land produces 20kg and the fourth-grade land being less fertile, only 10 kg. So, the first-grade land earns a surplus or rent of Rs. 30, the second grade earns a rent of Rs. 20, the third one earns a rent of Rs. 10 and the fourth-grade land earns no surplus. This simple example shows how the differences in the fertility of the different plots of land create rent for the superior plots of lands.

This can further be explained with the figure below:

In the above figure, X-axis represents the grade of land and y-axis represents the productivity. The rent of land increases as the fertility of land also has a quality. The shaded region shows the rent of the land which generates the surplus. The fourth-grade land is the marginal land or no rent land which do not earn a surplus.

Criticisms of the Theory

1. Fertility of land is not original

The production capacity of land is mainly the result of human efforts. Thus, it is not possible to say which qualities of land are original and which of them are man’s creation.

2. Rent enters into the price

According to Ricardo, rent, and a piece of land are unrelated, so a level of rent plays a role in fixing the price but the modern economist says the price of land highly depends on the amount of rent paid for it.

3. Wrong assumption of no rent land

Ricardo's opinion that the marginal land which just meets the cost of cultivation is no rent land. However, modern economics say that even the marginal land is paid rent because it can give more productivity in case if alternative crops are planted.

4. Rent for different fertility of soil

According to Ricardo rent is paid in relation to the difference in fertility of the soil. But the modern economist says that the rent will arise even if the land has same fertility.

5. Use of land in Order

Ricardo says that the people use land in declining order of fertility. However, there is no historical evidence that people use the most fertile land at first when they settle in the new place.

6. Neglects the scarcity principle

This theory has completely disregarded the role of the scarcity and in determining the rent. According to the modern economist, rent is paid simply due to scarcity.

(Jha, Bhusal, and Bista)(Karna, Khanal, and Chaulagain)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.