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Rent land of mine google11/10/2022 (ii) It is simply based on the natural variation of the fertility of different pieces of land We shall better understand the modern theory of rent if we first know the implications of and objection to the Ricardian Theory. This is partly counteracted by the importation of supplies at a cheap rate and by agricultural improvements which increase the supply without extending the area of cultivation. Both causes operate to lower the margin of cultivation and, thus, increase rent. Such land will not be used at all.Īn increase in population causes rent to rise for two reasons-firstly, the increased demand for food raises the price of agricultural produce and, secondly, more land must be cultivated to supply the needs of the people. If land is so poor that it will not even pay labour and capital costs, like the F land in our illustration, it is called sub- marginal land. When returns to producers who use land are sufficient to pay only for labour and capital costs, the land is called marginal or no-rent land. Hence, there is no marginal product attributable to land E and no income for the owner. We observe that E land is cultivated, but that the return in sufficient only to pay for the labour and capital costs involved. We see that, under extensive cultivation only, rents will vary in amount of different pieces of land because the application of the same amounts of labor and capital to different plots will yield different results. It illustrates graphically how differences in rent arise. Rents on land of unequal fertility on the assumption that only extensive cultivation is possible:įigure above shows the different rents that result when plots of land of different fertility are cultivated extensively. As the price of this rises, lands of inferior quality will pay for cultivation and, similarly, if the price falls, those lands will fall out of cultivation. The margin of cultivation is determined by the price of agricultural produce. Of course, cost of transportation must be first deducted. Rent is measured from this point for rent is always the difference between the produce obtained by the employment of the two equal portions of capital and labour upon the land. Land on the margin just pays for the expenses of cultivation, viz., wages and profit on capital, and it yields on surplus for rent. The land of the second quality is now said to be land on the margin of cultivation. (2) The law of diminishing returns leading to an intensive margin. (1) Resort to inferior lands leading to extensive margin, In Ricardo’s law of rent, we have two margins. The land margin is made the central point in the Ricardian theory of rent. The laws of supply and demand, however, explain the operation by which such rent is fixed, for just as the competition of farmers will enable landlords to claim that portion in excess of ordinary profits, so, on the other hand, the competition of landlords renders the exaction of more than this impracticable. Thus, Economic Rent exists, if a gift of nature is limited and appropriate and differential profit arises by its use. This constitutes economic rent and the amount of rent is equal to the difference between the value of its produce, and the produce of the second quality with the same expenditure of labour and capital. How the same amount of capital yields different amounts of produce on the two qualities of land but since all the produce must sell at the same price, a differential profit emerges from the better land. The relative scarcity raises price, and at this higher price it pays to resort to inferior land. It is a surplus enjoyed by the super marginal land over the marginal land arising due to the operation of the law of diminishing returns.Īs population increases the yield from the best land (the methods of cultivation remain the same) will not meet the demand. This is known as Ricardo’s Theory of Rent.Īccording 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. Thus, rent arises out of the difference existing in the productiveness of different soils under cultivation at the time for the purpose of supplying the same market, and the amount of rent is determined by the degree of those differences. It is plain that the farmer may just as well pay for the superior land as get the inferior land rent free. The differential advantage of the superior land over the inferior gives rise to Economic Rent. If the superior land will not support the population, recourse must be made to inferior lands and the produce is, thus, raised at different costs. The quantity of land is limited, and so is its productiveness, and it is not uniform in quality. ADVERTISEMENTS: Ricardo’s Theory of Rent :
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