Ricardian Theory of Rent

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Ricardian Theory of Rent

The classical theory of rent is associated with the name of David Ricardo, an English economist, who defined and analysed the payment made to land in scientific manner. 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.” The manner in which rent emerges may be illustrated as follows:

Let us suppose that some people migrate to a new country and settle there. Let us further assume that there are different qualities of land say A, B, C and D depending on the fertility of the soil or superiority of situation. In the first instance, A grade lands which are the most fertile and most favorably situated are more than enough for the people and so will be cultivated first. At this stage no rent is paid because ample land of the first quality is available. But as population increases and the output of the A grade land is brought under cultivated, rent arises. Its amount wills depend upon the difference in the produce raised on grade A and B of land. The land B is now said to be the land on the margin of cultivation. It just pays for the expansion of production and yields no surplus to be paid as rent. Suppose, with an equal amount of expenditure and with the same methods of cultivation, A grade land yields 40 kg of wheat while B grade land yields only 30 kg. The land A enjoys a surplus of 10 kg of wheat which is known as economic rent. B grade land does not enjoy any surplus is called no rent land. With the increase of population it becomes necessary to cultivate still inferior soil, C grade land will begin to bear rent equal to the difference in the produce raised on it and the C grade land, while land A will enjoy a higher rent due to the increase in the surplus enjoyed by it over C grade land. With every increase in the margin of cultivation, rent increases. When D grade land is cultivated, the other three lands A, B and C become super marginal and begin to yield rent equal to the surpluses enjoyed by them over the D grade land.

A growing population compels either an extension of cultivation to inferior lands or intensive exploitation of lands already under cultivation. Even in the case of intensive cultivation, the phenomenon of rent is to be seen in the excess of returns to the earlier doses of labour and capital applied to land over and above the returns from the marginal dose. This happens in accordance with the celebrated law of diminishing returns. The application of the marginal dose would be worthwhile, only if the returns equal extra cost. The dose which just equals the value of marginal returns at some point, could be the marginal dose, comparable to the marginal no rent land under a situation of extensive cultivation.

As a natural corollary of his theory of rent, Ricardi held that rent was the result of price and, therefore did not enter into price. The price, of agricultural produce is determined by the cost of production on land which is on the margin of cultivation. It enjoys no surplus and hence cannot afford to pay any rent. Rent, therefore, does not enter into the price of agricultural produce, "Corn is high not because rent is paid but rent is paid because corn is high".


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