ICS FA ICom Notes Class XI Principles of Economics Rent, Recardian Theory of Rent and Quasi Rent

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Definition of Rent

In ordinary sense the term rent refers to the hiring charges paid to the owner of an asset for using his right of ownership for a specific period of time. In economics the term rent is called economic rent. It is defined as

“That part of the payment by the tenant, who is made only for the use of land i.e. free gift of nature”.

In economics rent is mainly related to agriculture and is mainly distinguished as economic and contact rent.

Economic Rent and Contact Rent

Some times the agriculturist tenant makes the payment which consist on capital made by the landlord such as drainages, wells etc. This part of the payment, which consists of the interest on capital made by the landlord, is called contact rent. Where as the part of the payment which is made for the use of land only is called economic rent.

Rent and Transfer Earnings

The concept of the rent is also explained by the help of transfer earnings. The amount which factor can earn in its next best paid alternative use called transfer earning. In this sense if the factor is earning above its transfer earnings, the surplus or excess earnings is called economic rent.

Recardian Theory of Rent

The British economist Devid Recardo propounded the theory of rent a century ago.

Assumptions

The Recardian theory of rent is based on the following assumptions.

1. Rent is paid to the landlord for the use of original and the indestructible power of land.
2. Rent is a differential return due to the differences in the fertility of land as well as their locations. The more fertile land the higher will be its rent and vice versa.
3. The Recardian theory depends on the historical order of cultivation i.e. the more fertile land is cultivated first and such rent does not pay rent in the beginning but as but as other grades of land come under cultivation it begins to pay the rent.
4. The land on which the cost of production is equal to the amount it produces is a no rent land or marginal land.

Theory

The Recardian theory of rent can be stated as

“Rent is that portion of the produce of earth which is paid to the land lord for the use of original and indestructible power of soil”.

Economic rent according to Recardo is the true surplus left after the expenses of cultivation as represented by payment to labour, capital and enterprise.

Criticism

Recardian theory of rent has been criticized on the following grounds.

1. Recardo’s statement that the properties of soil are indestructible is wrong. The fertility of land often gets exhausted when it is continuously used. However it can be increased by using artificial manures but such fertility is considered to be temporary.
2. Statement of the theory that the superior land is cultivated first is not always true. Actually in general the order of cultivation is not the same as the theory says since a cultivates that land first which is near to him.
3. Recardo assumes that the no rent land exists in a country is also not applicable everywhere. This concept of no rent land is merely imaginary and theoretical.

Quasi Rent

The concept of Quasi rent was first introduced by Marshal according to him, quasi rent is a surplus earned by investments of production other then land. It is the income derived from appliances and machines, which are the product of human effort. Quasi rent stands for whole of the income, which some agents of production yield when demand for them is suddenly increased. It is earned during a period that their supply cannot be increased in response to increase in demand for them. Hence it is a short period concept. It has also been defined as the excess of total revenue earned in the short run over and above the total variable costs.

QUASI RENT = TOTAL REVENUE – TOTAL VERIABLE COST

The concept of quasi rent can be understood with the help of an example. At the time of independence of Pakistan, the demand for houses increased due to sudden increase in population but the supply could not be increased due to the scarcity of building material. The abnormal increase in the return on capital invested in capital (building) is quasi rent.