MODERN THEORY OF

RENT

DR. LAXMI NARAYAN YADAV

ASSISTANT PROFESSOR OF ECONOMICS

GOVT. P.G. COLLEGE MAHENDERGARH

E-mail: laxmi_narayan70@yahoo.com

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.

The modern economists like Pareto, Mrs. Joan

Robinson, Boulding, Stigler, Shepherd, opined

the Ricardian theory of rent is too closely

related to land.

Boulding and Joan Robinson emphasized that

whenever the supply of factor units to an

industry or economy is not perfectly elastic, a

part of the earnings of a factor will consist of

surplus or economic rent, since the full price

they get are not necessary to make all the

factor units available.

According to the modern theory of rent, the

rent of a factor, from the point of view of any

industry, is the difference between its actual

earnings and transfer earnings.

Rent = Present Earnings - Transfer Earnings.

Transfer earning refers to the amount of

money, which a factor of production could earn

in its next best-paid use (opportunity cost).

Whole produce is

rent D`

D

Here Present Earnings =

ORxOS = ORES

Transfer Earnings = Zero

Rent = Present Earnings

- Transfer Earnings.

Thus Rent = ORESE

S`

R

O SHectare of Land

Pri

ce

Now if demand increases from DD’ to D0D0

Then Rent increases

from ORES to OPFS

D0

F

D0

S`

E

D`

D

R

O S

P

Rent = Present Earnings

- Transfer Earnings.

Here:

Present Earnings = OSEM

Transfer Earning = OSEM

Rent = OSEM-OSEM

= ZERO

ES`S

O MHectare of Land

Pri

ce

D`

D

Then Present Earnings

increases from OSEM to OSFN

Transfer Earning also

increases to OSFN

Rent = ZERO

D0

F

D0

Now if demand increases from DD’ to D0D0

N

ES`S

O MHectare of Land

Pri

ce

D`

D

Ath unit of Factor has a supply price equal to

AQ. In other words, AQ must be paid to the Ath

unit of land in order to keep it in the wheat

industry.

Ath unit of land

obtains price (AH

= OP) while its

transfer earnings

are only AQ.

Therefore, Ath unit

of land earns QH

as economic rent (QH = AH-AQ)F

I

D

K

B

R

C

J

ST

E

L

U

S

S

O

Pri

ce

M

D

D

H

A

Q

Rent can be a part of the income of all factors of

production. Entire income of land is called rent

because its supply is perfectly inelastic. But in this

case of other factors, only a part of their income is of

the nature of rent.

FEATURES OF

MODERN THEORY OF RENT

Rent can be a part of the income of all factors of

production. Entire income of land is called rent

because its supply is perfectly inelastic. But in this

case of other factors, only a part of their income is of

the nature of rent .

FEATURES OF

MODERN THEORY OF RENT

Amount of rent depends upon the difference

between actual earning and transfer earning.

Rent arises when the supply of the factor is

either perfectly inelastic or less elastic . On the

other hand no rent arise when the supply of the

factor is perfectly elastic.

AMPLIFICATION OF RICARDIAN THEORY

According to the Ricardian theory, 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. Rent therefore is peculiar to land alone. It is not

available to other factors of production. But according to

modern theory, rent is also earned by other factors, such

as labour, capital entrepreneur etc, reason being that

rent arises when a factor becomes either specific or its

supply less than perfectly elastic.

MODERN THEORY IS A MODIFIED AND

AMPLIFIED FORM OF RICARDIAN THEORY

MODIFICATION OF RICARDIAN THEORY

Modern theory of Rent has made the following modification:

Measurement of Rent: According to Ricardian Theory, rent

is the difference between the produce of marginal land and

that of intra marginal lands. This concept is based on the

assumption that there does exist a land that earns no rent,

but in reality there does not exist any land. Consequently,

rent in Ricardian sense cannot be measured. According to

modern theory, rent is measured from the difference between

actual earning and transfer earning.

MODERN THEORY IS A MODIFIED AND

AMPLIFIED FORM OF RICARDIAN THEORY

Cause of Emergence of Rent : The logic given bythe modern theory regarding the cause of emergenceof rent is more realistic. According to Ricardo,scarcity of land gives rise to rent. Because of scarcityof land, people have either to use of inferior land orput more and more units of labour and capital onthe same piece of land. There is difference in amountof produce of inferior and superior land. Due todifference, superior land enjoys some surplus overinferior land.

MODIFICATION OF RICARDIAN THEORY

Rent and Price : Modern theory is a modified formof Ricardian theory, in respect of relation between rentand price. According to Ricardo, rent does not enterinto price. But according to modern economists it isnot wholly true. They hold that from the point of viewof an economy, rent does not enter into price.

MODIFICATION OF RICARDIAN THEORY

There are two views of economists in respect of rent and price : (i) Ricardian view (ii) Modern view

RENT AND PRICE

Ricardian View

Ricardo is of view that the rent does not enter in price. It

is price that influences rent and not rent that influences

price. Ricardo’s view is based on the assumption that (i)

supply of land is limited for the society (ii) land has no

cost of production and (iii) land has only one use.

Marginal land is no rent land. It does not yield any rent.

However price of agricultural produce is determined by

the cost of production of the produce raised on marginal

land.

Modern view of rent is more comprehensive and logical.

According to this theory, it is wrong on the part of

Ricardo to assert that rent never enters into price .

Modern economists view the relationship between rent

and price from three different angles:

From point of view of Economy

From the point of view of industry

From the point of view of firm

Modern View

RENT AND PRICE

From point of view of Economy

From the point of view of the entire economy, land is a

free gift of nature. Total supply of land is perfectly

inelastic, so there is no need of paying any minimum

supply price for its use. In other words, from the point of

view of economy transfer earning of land is zero.

Accordingly, entire earning of land is a surplus or rent.

Modern View

RENT AND PRICE

From the point of view of industry

Land can have alternative uses for an industry. In order to make

use of land, the industry will have to pay a minimum price

equivalent to its transfer earning.

Rent and Price: Modern View

If more price than the transfer earning is required to be paid

for the land for a given industry, then the amount by which the

price is more than transfer earning will be called its rent.

Thus from the point of view of industry, transfer earning of the

land is included in the cost and so influences the price; but the

income, over and above the transfer earning, called rent, is not

included in cost and accordingly does not influences the price.

Price that an individual producer pays for the land, is

very much a part and parcel of his expense and so is

included in the average cost of production of the

commodity. As such from the point of view of an

individual producer, rent influences price, that is, rent

enters price of the product

From the point of view of firm/individual producer

Rent and Price: Modern View

RELATION BETWEEN RENT AND PRICE

AREA RELATION

From the point of

view of an economy

Entire income of land will be called

rent, but rent will not enter price

From the point of

view of an industry

(a)Minimum price or transfer earning of

land will enter in price

(b)Earning of land which is above the

transfer earning is called rent and

does not enter in price

From the point of

view of a Firm

Rent enters price ; i.e., influences the

price

According to Ricardian, rent is peculiar to land

only. But the modern economists hold that

rent can be a part of the income of each factor

of production .

DIFFERENCE BETWEEN RICARDIAN

AND MODERN THEORY OF RENT

According to Ricardian Theory, rent is the

reward for the original and indestructible

powers of the soil. Modern theory of rent

attributes it to the difference between actual

earning and transfer earning.

According to Ricardo, rent does not enter into price.

Rent is not price determining, it is price determined.

But according to modern theory of rent, relation

between rent and price is not so simple, from the

point of view of an economy , rent does not enter in

price , but from the point of view of a firm it does not

enter into price

DIFFERENCE BETWEEN RICARDIAN

AND MODERN THEORY OF RENT