RICARDIAN

THEORY OF RENT
 DR. LAXMI NARAYAN YADAV
ASSISTANT PROFESSOR OF ECONOMICS
GOVT. P.G. COLLEGE MAHENDERGARH
E-mail: laxmi_narayan70@yahoo.com
DEFINITION

Classical Definition
Carver: Rent is the price paid for the use of land.

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.
Anatol Murad: Rent is that portion of the landlords
income which is attributable to his ownership of
land
DEFINITION
Modern Definition

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.

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.
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.
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.
Various economists have proposed different
theories for the origin of rent. Prominent
among the theories of rent are:
(a) Ricardian Theory of Rent
(b) Modern 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.
 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.
 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.
 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.
 The quantity of land is limited, and so is its
productiveness, and it is not uniform in quality.

 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.
 The amount of rent is determined by the degree
of the differences in productivities of land.
According to Ricardo, rent can be determined
under two situations:
a) Extensive Cultivation: It refers to the system
of cultivation wherein more land is used to
increase production.
b) 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
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".
 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.
 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:

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
 Grades of Yield per
60 RENT
Land Acre
A 60 60-20=40
Yield in Quintals Per Hectare

50 B 50 50-20=30
Rent on A Grade
Land =60-20= 40

Rent on B Grade C 35 35-20=15

40 Land =50-20= 30 D 20 20-20=00

30

20

10

A B C D Grade of Land
 60 Yield in
Grades
Quintals RENT
Yield in Quintals Per Hectare

of Land
50 per Acre
A 60 60-20=40
40 B 50 50-20=30
C 35 35-20=15
D 20 20-20=00
30

20

10

Grade of Land
A B C D
 MC
MC
MC AC S
AC
S AC P
P E
F
Q G
R D
F

O O O D Grade O
A Grade B Grade Output
 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.
For 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.

Combination of
Yield per Acre RENT
Labour and Capital
A 60 60-20=40
B 50 50-20=30
C 35 35-20=15
D 20 20-20=00
 Yield in Quintals Per Hectare

10
20
30
60

50

40
Rent on combination

A
A =60-20= 40

B
C
D
Grade of Land
 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