According to Ricardo, rent is the payment for the use of only land and is different from contractual rent which includes the returns on capital investment made by the landlord in the form of wells, irrigation structures, etc. besides the payment for the use of land. 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.
Cause of rent: a) difference in the productivity of various pieces of land; and b)situational differences
Assumptions of the Ricardian theory:
- a) Land differs in fertility.
- b) The most fertile lands are limited in supply.
Let us assume that there are four types of land, classified based on its fertility, viz., A, B, C, and D. A is the most fertile land and D is the least fertile land. People from the neighbouring place come in batches to settle on the land. The first batch of people will naturally cultivate the most fertile land, i.e., A-grade land. Let us assume that one dose of labour and capital on ‘A’ quality land yields 20 quintals of paddy per acre. Then, the second batch of settlers has two alternatives – either to cultivate B quality land, which is free or to take ‘A’ quality land on rent from the first batch. It is obvious that the rent payable on the ‘A’ quality land would be equal to the differences in the fertilities of A and B quality lands. Let us assume that one dose of labour and capital applied to ‘B’ quality land yields 18 quintals of paddy. Now the rent is equal to 2 quintals, i.e., 20-18 quintals of paddy, because this represents the difference between the fertilities of the two types of lands.
Table 7.1: Returns for the different qualities of Land
Doses of Labour and Capital Returns from A Returns form B Returns form C Returns form D
1st 20 18 16 14
2nd 18 16 14 12
3rd 16 14 12 10
4th 14 12 10 8
Even if the second batch decides not to take up A quality land on rent, rent would still arise on ‘A’ quality land. Since the market price of paddy will be equal to the cost of production at ‘B’ quality land, ‘A’ quality land will have a surplus over ‘B’ quality land. The surplus return for A quality land arises due to its superior fertility in comparison with the ‘B’ quality land. Suppose, if 10 doses of labour and capital are available, rent from various qualities of land will be:
Rent of A grade land = Total quantity of produce – Total cost = 68 – 56 = 12 quintals
Rent of B grade = 48 – 42 = 6 quintals
Rent of C grade = 30 – 28 = 2 quintals
Rent of D grade = 14 – 14 = 0 (no rent)
fig. Ricardian rent
In this example, D quality land is the marginal or no-rent land, because it earns no rent. Thus, rent arises on account of natural differential advantages of a piece of land over the marginal land. The natural differential advantages may be due to either superior quality of land or its better situation. In A quality land, OP is the price and OJ is the cost and JPEK represents the rent. The D grade land will be cultivated only when the price of the output and average cost of production are equal, i.e., no rent is obtained in D quality land. Thus, rent does not form a part of the cost of production. Rent is the earnings over and above the cost of production of the marginal land, but the marginal land has no rent. Therefore, rent is not price-determining; it is price determined. To quote Ricardo, “Corn is not high because rent is paid, but rent is paid because corn is high”
Criticism of the Ricardian Theory
According to Ricardo, rent is due to the original and indestructible powers of the soil. But the fertility of the soil can be increased through manuring. Likewise, the fertility of the soil can be destroyed through continuous cultivation without manuring.
In a thickly populated country, even the most inferior land yields rent and there is no marginal land in those countries. Thus, rent is not due to fertility, but to the scarcity of land.
