Modern Theory of Rent

Modern Theory of Rent:

In modern theory of rent, the word rent refers to “payments made for factors of production that are in imperfectly elastic supply”.

By this definition, rent is exerted to other factors such as labor and capital. In another words, rent does not exert to land alone. Just as land varies in fertility, men vary in their ability. For illustration, a surgeon with a rare skill might earn a lot of income. There is an element of rent in it. In fact, we have a theory of profits termed as “Rent theory of profits”.

Marshall has mentioned the concept of “Quasi-rent” with regard to machines and other man-made appliances. Therefore the modern view is that rent can be exerted to all factors of production. If, the supply of a factor is inelastic in relation to the demand for it, rent takes place.

To elucidate rent, modern economists also make utilizations of the word transfer earnings. Transfer earnings refer to the quantity that a factor could earn in its finest paid alternative employment. It symbolizes the opportunity cost of its current employment. Any payment in surplus of this amount is an excess above what is essential to retain the factor in its best-paid employment and thus is rent. Therefore, any payment in surplus of transfer earnings is economic rent. When a popular actor who is normally paid, say $ 2 crores, gets an offer to act in a another film for $ 3 three crores, his transfer earnings are $ 2 crores. $ 1crore might be considered as economic rent for acting in another film. Hence the main point regarding the modern theory of rent is that rent is not weird to land alone. The rent feature can be seen in other factor incomes also.


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