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Sunday, 8 May 2011

Define Rent and Critically examine the Ricardian Theory of Rent


RENT :-
According to the classical economist rent is a price of land. It is paid to the landlord by the tenant for the use of land. Modern economists apply rent to all the factors of production which do not have a perfect elastic supply.

RICARDO'S THEORY OF RENT

DEFINITION :-
Ricardo says . "That portion of earth product which is paid to the land-lord on account of the original and indestructible powers of the soil."

Ricardo explains this theory by the following example.

EXAMPLE :-
Ricardo has given the example of uninhabitable country.The people come in this country in groups, there are four grades of land A,B,C and D. A grade land is more fertile than "B" and "B" grade land is more fertile than "C". Ricardo assumes that people migrate to this island. The people of the country would first cultivate "A" grade land which is more fertile than the others. So long as "A" grade land is sufficient to meet requirements of the population, it will be a free good, and it will be called no rent land. It is supposed that it only covers the cost of production. Population increases, then "A" grade land will not be sufficient , so "B" grade land will be cultivated. Now "A" grade land will pay rent but "B" grade land will be called no rent land."A" grade land and "B" grade land production difference will be called the rent of "A" grade land.This process continuous. Marginal land is called no rent land, it only covers the cost of production, If equal amount of capital and labour is applied to all these lands, there will be difference in their productivity.

EXPLANATION :-
According to this table if we apply the same amount of inputs on all the lands, the production from "A" grade 25 from "B" 20 and "C" from 15, and "D" from 10 quintal. "D" grade land is no rent land and 10quintal rice only cover the cost. So rent will be calculated by deducting 10 quintals.
EXPLANATION :-
According to this diagram "A" grade will pay 15 quintals of rice according to shaded area. "B" grade 10 and "C" grade 5. D will be no rent land.

ASSUMPTIONS OF RICARDO THEORY OF RENT

1. DIFFERENCE IN FERTILITY :-
All the units of land differ in fertility and location.

2. DIFFERENCE IN PRODUCTION :-
There is a difference between superior and inferior grade of land. The difference in production is called rent.

3. PERFECT COMPETITION :-
There is a perfect competition among the landlords and tenants.

4. LAW OF DIMINISHING RETURN :-
Ricardo says that law of diminishing return applies to the production of land.

5. NO RENT LAND :-
The land which just compensates the cost of cultivation is called no rent land.

6. KNOWLEDGE OF FERTILE LAND :-
Ricardo amuse that people know that which land is more fertile and which is less fertile. So people cultivate superior land first.

7. RENT IS NOT INCLUDED IN PRICE :-
He says that rent does not enter into price. it is something extra.

8. ORIGINAL AND INDESTRUCTIBLE QUALITIES :-
Rent arises due to the original and indestructible powers of soil.

CRITICISM ON RICARDO THEORY OF RENT

This theory has been criticized on the following grounds :

1. INDESTRUCTIBLE POWERS :-
It is pointed out that there are no powers of the soil which are indestructible. Continuous cultivation decreases its fertility.

2. "A" GRADE LAND FIRST :-
It is wrong assumption that "A" grade land is cultivated first and "B" grade second. In USA and Canada. there was an opposite situation.

3. EQUALLY FERTILE CASE :-
According to this theory rent arises due to the difference in fertility. If all the lands are equally fertile even than rent will be paid.

4. OBJECTION ON NO RENT LAND :-
No rent land concept is imaginary in real world we can not find it.

5. RENT ENTERS INTO PRICE :-
According to Ricardo, rent is not included in price, while the rent actually enters into price and it is the part of cost.

6. DOES NOT THROW LIGHT ON THE DETERMINATION ON RENT :-
This theory explains that why rent arises but fails to explain that how the rate of rent is determined.

7. NO NEED OD SEPARATE THEORY :-
For the determination of rent there was no need of separate theory. Demand and supply theory is sufficient for it.

3 comments:

Anonymous,  6 September 2013 08:47  

Hey! This post couldn't be written any better! Reading this post reminds
me of my good old room mate! He always kept chatting about this.

I will forward this post to him. Pretty sure he will have a good read.
Thanks for sharing!

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s.bhattacharjee,  26 April 2014 11:59  

very helpful indeed..

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