Ricardian theory of Rent

The Ricardian theory of Rent:

Ricardian theory of rent is one of the first theories of rent. This is termed after Ricardo, a great classical economist of the nineteenth century.

According to Ricardo, “rent is that part of the production of the earth that is paid to the landlord for the utilization of the original and indestructible powers of the soil”. Therefore rent is payment made for the employ of land for its original powers. Ricardo believed that rent takes place on account of differences in the fertility of land. Merely superior lands acquire rent. Rent is a differential excess.

Rent might too arise on account of situational benefit. For illustration, some lands might be closer to the market. The producer can save a lot of transport costs. Even when all lands are uniformly fertile, lands that enjoy situational benefit will earn rent.

Ricardo described his theory by taking the illustration of colonization. When some people go and settle down in a place, at first they will cultivate the best lands. When more people go and settle down, the demand for land will raise and they will cultivate the second-grade lands. The cost of production will go up. Therefore the price of grain in the market should cover the cost of cultivation. In this situation, the first grade land will obtain rent.

After some time, when there is raise in population, even third grade lands will be cultivated. Now, even second grade lands will obtain rent and first grade lands will obtain more rent however the third grade land will not obtain rent. It is termed as no-rent land. According to Ricardo, rent is price determined, i.e., it is determined by price of the grains generated in the land. He also believed that rent is high since price is high and not the other way round. Ricardo came to the conclusion that rent did not enter price since there are certain no-rent or marginal lands. Since the produce of no-rent land obtains a price, Ricardo argued that rent did not enter price.

In figure below, grades of land are shown all along the X axis and the yield up the y–axis. The shaded region in the diagram points out rent. In this condition, grade I and grade II lands get rent. The grade III land will not obtain rent.

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Figure: Diagrammatic example of Ricardian theory of Rent

 

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