Rent: Definition and Types of Rent

In simple words, ‘rent’ is used as a part of the produce which is paid to the owner of land for the use
of his goods and services. But, in economics, rent has been differently defined from time to time.

Thus rent refers only to make payments for factors of production which are in imperfectly elastic
supply. For instance, it is the price paid for the use of land.

Definition of Rent:

The concept of rent has been defined as follows:

“Rent is that portion of the produce of earth which is paid to landlord for the use of original and
indestructible powers of the soil.” -Ricardo

“Rent is the income derived from the ownership of land and other free gifts of Nature.” He further
called it ‘Quasi Rent’ which arises on the manmade equipment’s and machines in the short period
and tend to disappear in the long run. – Marshall

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

Economic rent is also termed as surplus as it is received by landlord without any effort. Prof.
Bounding termed it as “Economic Surplus.” Moreover, modern economists comprising of Mrs. Joan
Robinson, Boulding etc. opined that part of the income of each factor can be rent.

Income alone received by land cannot be rent. It is so because different factors have different uses.
As such, each factor will be used for that purpose in which its income is maximum. Opportunity cost
of a factor for its use in the work yielding maximum income is the price of output that the factor
concerned can earn by working in next alternative use.

Definition of Economic Rent:

The definitions of economic rent can be grouped into two parts as:

Classical Definitions:

“Economic rent is the payment for the use of scarce natural resources”. – Jacob Oser

“Economic rent is that portion of a landlord’s income which is attributable to his ownership of land.”
– Anatol Murad

Modern Definitions:

“Economic Rent may be defined as any payment to a factor of production which is in excess of the
minimum amount necessary to keep the factor in its present occupation.” – Boulding

“Rent is the difference between actual payment to a factor and its supply price or transfer earnings.”
– Hibdon

Types of Rent:

The main types of rent are as under:

1. Economic Rent:

Economic rent refers to the payment made for the use of land alone. But in economics the term rent
is used in the sense of economic rent. In the words of Ricardo and other classical economists,
economic rent refers to the payment for the use of land alone It is also called Economic Surplus
because it emerges without any effort on the part of landlord. Prof. Boulding termed it “Economic
Surplus”.

2. Gross Rent:
Gross rent is the rent which is paid for the services of land and the capital invested on it.

Gross rent consists of:

(1) Economic rent. It refers to payment made for the use of land.

(2) Interest on capital invested for improvement of land.

(3) Reward for risk taken by landlord in investing his capital

3. Scarcity Rent:

Scarcity rent refers to the price paid for the use of the homogeneous land when its supply is limited
in relation to demand. If all land is homogeneous but demand for land exceeds its supply, the entire
land will earn economic rent by virtue of its scarcity. In this way, rent will arise when supply of land is
inelastic. Prof. Ricardo opined that land was beneficial but it was also scarce. Productivity of land
was indicative of the generosity of nature but its total supply remaining more or less fixed
symbolized niggardliness of nature.

4. Differential Rent:

Differential rent refers to the rent which arises due to the differences in the fertility of land. In every
country, there exists a variety of land. Some lands are more fertile and some are less fertile. When
the farmer’s are compelled to cultivate less fertile land the owners of more fertile land get relatively
more production. This surplus which arises due to difference in fertility of land is called the
differential rent. This type of rent arises under extensive cultivation. According to Ricardo, “In order
to increase production on same type of land, more units of labour and capital are employed.”

5. Contract Rent:

Contract rent refers to that rent which is agreed upon between the landowner and the user of the
land. On the basis of some contract, which may be verbal or written, contract rent may be more or
less than the economic rent.

Ricardo’s Theory of Rent:

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. It is plain that the farmer may just as well pay for the superior
land as get the inferior land rent free.

Thus, rent arises out of the difference existing in the productiveness of different soils under
cultivation at the time for the purpose of supplying the same market, and the amount of rent is
determined by the degree of those differences. This is known as Ricardo’s Theory of Rent.

According to Ricardo, rent is that portion of the produce of the earth, which is paid to the landlord
for the original and indestructible powers of the soil. It is a surplus enjoyed by the super marginal
land over the marginal land arising due to the operation of the law of diminishing returns.

Productiveness depends on fertility and convenience of situation. Therefore, Economic Rent in its
simplest form is the differential profit that arises in the case of production, owing to differences in
natural conditions due to:

(1) Fertility of the soil,

(2) Advantages of situation.

Take, for simplicity, a new country dependent on its own supplies and occupied by a body of settlers.
At first we may suppose that there is an abundance of the best land and that it is practically free. In
this case only the best land will be used, and the produce will sell so as to just cover (with current
wages and profits) the expenses of production. So far, there is no differential profit and, thus, no
economic rent.

As population increases the yield from the best land (the methods of cultivation remain the same)
will not meet the demand. The relative scarcity raises price, and at this higher price it pays to resort
to inferior land. now the same amount of capital yields different amounts of produce on the two
qualities of land; but since all the produce must sell at the same price, a differential profit emerges
from the better land.

This constitutes economic rent and the amount of rent is equal to the difference between the value
of its produce, and the produce of the second quality with the same expenditure of labour and
capital. Thus, Economic Rent exists, if a gift of nature is limited and appropriate and differential
profit arises by its use.

The laws of supply and demand, however, explain the operation by which such rent is fixed, for just
as the competition of farmers will enable landlords to claim that portion in excess of ordinary profits,
so, on the other hand, the competition of landlords renders the exaction of more than this
impracticable.

The land margin is made the central point in the Ricardian theory of rent. In Ricardo’s law of rent, we
have two margins—

(1) Resort to inferior lands leading to extensive margin,

(2) The law of diminishing returns leading to an intensive margin.

The land of the second quality is now said to be land on the margin of cultivation. Land on the
margin just pays for the expenses of cultivation, viz., wages and profit on capital, and it yields on
surplus for rent. Rent is measured from this point for rent is always the difference between the
produce obtained by the employment of the two equal portions of capital and labour upon the land.
Of course, cost of transportation must be first deducted. The margin of cultivation is determined by
the price of agricultural produce. As the price of this rises, lands of inferior quality will pay for
cultivation and, similarly, if the price falls, those lands will fall out of cultivation.

Extensive Cultivation
Under extensive cultivation, more output is produced by increasing the quantity of land. To explain,
how rent arises, David Ricardo took the case of a newly developing island where land is far in excess
of what is required for the people living there.
Rents on Land Of Unequal Fertility on the Assumption That Only Extensive Cultivation Is Possible

Figure above shows the different rents that result when plots of land of different fertility are
cultivated extensively. It illustrates graphically how differences in rent arise. We see that, under
extensive cultivation only, rents will vary in amount of different pieces of land because the
application of the same amounts of labor and capital to different plots will yield different results.

Intensive Cultivation:

 Intensive cultivation refers to that type of farming in which increase in agricultural production, is

brought about only by applying more units of labour and capital on the same piece of land. In other
words, the area under intensive cultivation remains the same.

Marginal Land:

We observe that E land is cultivated, but that the return in sufficient only to pay for the labour and
capital costs involved. Hence, there is no marginal product attributable to land E and no income for
the owner. When returns to producers who use land are sufficient to pay only for labour and capital
costs, the land is called marginal or no-rent land. If land is so poor that it will not even pay labour
and capital costs, like the F land in our illustration, it is called sub- marginal land. Such land will not
be used at all.
An increase in population causes rent to rise for two reasons—firstly, the increased demand for food
raises the price of agricultural produce and, secondly, more land must be cultivated to supply the
needs of the people. Both causes operate to lower the margin of cultivation and, thus, increase rent.

This is partly counteracted by the importation of supplies at a cheap rate and by agricultural
improvements which increase the supply without extending the area of cultivation. We shall better
understand the modern theory of rent if we first know the implications of and objection to the
Ricardian Theory.

Implications:

(1) Land according to Ricardo is limited in supply and of different grades of fertility.

(2) Rent arises as differential advantage which superior lands possess over the inferior lands.

(3) Rent arise from the operation of the Law of Diminishing Returns.

(4) Rent is a surplus over and above no rent land.

(5) Rent does not enter into price.

Objections against Recardian Theory:

The following are some of the main criticisms of Ricardo’s theory:

Criticism of the Ricardian Theory of Rent

Ricardo tells that only the best lands are cultivated first. There is no historical proof for this.

1. According to Ricardo, land has 'original and indestructible powers'. But the fertility of land
may decline after some time because of continuous cultivation.

1. Ricardo believed that rent is peculiar to land alone. But many modern economists argue that
the rent aspect can be seen in other factors like labour and capital. Rent arises whenever the supply
of a factor is inelastic in relation to the demand for it.

2. Ricardo is of the view that rent does not enter the price of the commodity produced in it. But
rent enters the price from the point of view of a single firm.

3. Ricardian theory does not take note of scarcity rent.

4. It is based on perfect competition. Only under perfect competition, there will be one price for
a good. But in the real world, we have imperfect competition.

Though there are some criticisms against the Ricardian theory, we may note it tells that because of
increasing pressure on land, we have to cultivate inferior lands.