David Ricardo, an English classical economist, first developed a Ricardian theory of rent in 1817 to explain the origin and nature of economic rent. Ricardo used the economic and rent to analyse a particular question. In the Napoleonic wars (18.05-1815) there were large rise in corn and land prices.
He defined Ricardian theory of rent as “that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.”
Assumption
- Firstly, the supply of land is fixed and the existing quantity of land gifted by nature cannot be increased or decreased.
- Another assumption is that original powers such as fertility of land are gifted by God and are not due to human efforts of any type.
- Thirdly, Land is a non-perishable factor of production. The powers/qualities of land cannot be destroyed and the fertility of land never diminishes
- Land has only one use i.e. Cultivation. There are no alternative uses of land.
- Different lands have different fertility levels.
- Utilization of land for cultivation is done based on the order of fertility of land. Most fertile land is cultivated first before using the next grade land
- Law of diminishing returns or increasing costs operates in agriculture.
- Assumption of perfect competition is also made.
- Ricardo assumed the existence of margin land which is a ‘no rent land’. It could be understood as the grade of land after which no land is used.
Reasons for existence of rent
Let us assume that there are four types of land, classified based on its fertility, viz., A, B, C and D. Thus, A is the most fertile land and D is the least fertile land. People from the neighbouring place come in batches to settle on the land. The first batch of people will naturally cultivate the most fertile land, i.e., A grade land. Let us assume that one dose of labour and capital on ‘A’ quality land yields 20 quintals of paddy per acre.
Then, the second batch of settlers has two alternatives – either to cultivate B quality land, which is free, or to take ‘A’ quality land on rent from the first batch. It is obvious that the rent payable on the ‘A’ quality land would be equal to the differences in the fertilities of A and B quality lands. Let us assume that one dose of labour and capital applied to ‘B’ quality land yields 18 quintals of paddy. Now the rent is equal to 2 quintals, i.e., 20-18 quintals of paddy, because this represents the difference between the fertilities of the two types of lands.
| Return from different qualities of land | ||||
| labour and capital | Returns (in quantils of paddy per acre) | |||
| A | B | C | D | |
| 1 | 20 | 18 | 16 | 14 |
| 2 | 18 | 16 | 14 | 12 |
| 3 | 16 | 14 | 12 | 10 |
| 4 | 14 | 12 | 10 | 8 |
Even if the second batch decides not to take up A quality land on rent, rent would still arise on ‘A’ quality land. Since the market price of paddy will be equal to the cost of production at ‘B’ quality land, ‘A’ quality land will have a surplus over ‘B’ quality land. The surplus return for A quality land arises due to its superior fertility in comparison with the ‘B’ quality land. In addition Suppose, if 10 doses of labour and capital are available, rent from various qualities of land will be:
Rent of A grade land =
Total quantity of produce – Total cost
= 68 – 56 = 12 quintals
Rent of B grade = 48 – 42 = 6 quintals
C grade = 30 – 28 = 2 quintals
D grade = 14 – 14 = 0 (no rent)
In this example, D quality land is the marginal or no-rent land, because it earns no rent. Thus, rent arises on account of natural differential advantages of a piece of land over the marginal land. The natural differential advantages may be due to either superior quality of land or its better situation.
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