Explain Ricardian Theory of Rent

Mon, 10/14/2013 - 00:35 -- Umar Farooq

Explain Ricardian Theory of Rent

According to Recardian Theory of Rent, land is not uniform is quality and as population rises more and more marginal land must come into use. The high cost of producing on the most marginal last will decide the price of grain. The better land yielding a high return must earn economic rent. The rent payable on good or conveniently situated last as distinct from inaccessible marginal land of poor quality is payment to the landlord for the use of its peculiar and indestructible powers. The diagram shows three grades of land. When population was small and land plenty, equaled cost on A and there was no rent. When population increased B grade land of medium quality or less accessible was brought into cultivation and P1 was equal to cost and on B there was not rent, but on A economic rent PLEP1 arose. When population increased more and price of grain rose, plot C was brought into cultivation. Here P2 is equal tc the cost of production on marginal land “C” and it earns no economic rent. But because of high price B earns a rent of FEVN. “A” earns a rent of PLNP2.

The meaning of economic rent is much wider today. According to Pareto rent is a payment to a factor over and above what is necessary to keep in its present employment. If any factor of production, land, labor of capital, is not rewarded sufficiently in its present occupation then it will move out to seek better reward elsewhere. The factor must get as much as its transfer earning. Transfer earning are opportunity cost of the factor of production. If supply in inelastic factors will be paid economic rent. The supply of doctors, dentists, accountants, actors is inelastic. Because of long training and special talents, they are paid more than normal rewards. Laborers are poorly paid because their skills can be quickly acquired. “SS” supply curve is fixed inelastic. Equilibrium normal price is P. Demand increased to D1D1 and new equilibrium price P1. Because supply SS is inelastic PMNP1 is economic rent.

Criticism on Ricardian Theory of Rent

Although land is fixed in absolute, any one use is not fixed. Supply of land for a particular use can be changed in response to changes in demand.