Economics

Explain Ricardian Theory of Rent With Diagram

Ricardian Theory of Rent: Meaning, Assumptions,  Determination, Criticism, Conclusion are explained in detail below.

Ricardian Theory of Rent Meaning

The classical economists David Ricardo first propounded the theory of rent in 1817  in his book “Principles of Political Economy and Taxation” which is also known as Ricardian Theory of Rent. According to Ricardo, “Rent is that portion of the produce of the earth which is paid to the landlord for the use of original and indestructible power of the soil.”

According to this theory, land differs in fertility. Some lands are more fertile and some lands are less fertile. The difference in the fertility of the soil is the basis of the determination of this theory. The excess product of fertile land and the least fertile land is rent. Rent is a differential surplus that arises. Because of differences in the fertility of the land. Thus, it is measured by the difference between the produce on intramarginal land and produce on marginal land.

Ricardian Theory of Rent Assumptions

Ricardian theory of rent is based on the following assumptions:

  1. There is perfect competition in the economy.
  2. The supply of land is limited.
  3. The law of diminishing marginal returns applies.
  4. Rent arises in the long run.
  5. There is a difference in the fertility of the land.
  6. The land has only one use.
  7. There exists no-rent land or marginal land in the economy.
  8. Demand for agriculture products increases with the increase in population.
  9. The cost of agricultural production depends upon the amount of labor employed on it.
  10. The fertility of the land is original and indestructible.

Ricardian Theory of Rent Explanation

Ricardian theory of rent can be explained with the help of an example of a newly settled country. When the population is not much, the demand for food the demand may be met by the cultivation of only the best land i.e. A grade. But when the population increases, people will be forced to cultivate less fertile land.

To the application of the same amount of labor as was applied on the nest grade land, the less fertile land will yield less produce. Thus, the owners of superior land will enjoy a sort of surplus which is called rent. Thus, rent rises due to scarcity of land. The difference in fertility is the measure of rent.

Determination of Rent

Rent can be determined under two situations:

  1. Rent in extensive cultivation
  2. Rent in intensive cultivation

1. Rent in Extensive Cultivation

Extensive cultivation refers to that cultivation where more land is used to increase output. Rent in the extensive cultivation can be explained with the help of this example.

Let us suppose that in a country, there are four kinds of land A, B, C, D. A, B  grade land is superior and C, and D are inferior grades of land. When the population is not much, the demand of people may be met by the cultivation of only the best land i.e. A grade lands. The increase in population will increase the demand and also the prices of grain. Now it becomes necessary to cultivate less fertile land. By the application of the same dose of labor that was applied on A grade land, the less fertile land i.e. B grade land will yield less produce and rent will arise on A-grade land.

The emergence of rent under extensive cultivation can be explained with the help of this example.

Suppose that the same does of labor and capital produces 35 quintals of grain on A-grade land, 30 quintals on B and 25 quintals on C and 20 quintals on D. So long as A grade land is cultivated, no rent arises. When B grade land is bought under cultivation, the producer of. Grade earns a rent of 5 quintals and when C is cultivated there emerges a rent of 5 quintals on B grade and 10 quintals on A-grade land. When D is cultivated, there is no rent for it because D is marginal land. It is the most inferior land it will get no rent. Rent is the difference between the production of superior and marginal land. Thus, the rent of superior land goes on increasing as inferior are bought under cultivation.

Land Output( In quintals) Costs Rent
A 35 100 15
B 30 100 10
C 25 100 5
D (Marginal Land) 20 100 0

This table shows that D grade land produces 20 quintals of grain. Rent on A, B, C grades of land will be equal to the difference in the quantity produced on superior grades of land and that produced on marginal land i.e. 15, 10, 5.

Determination of Rent - Ricardian Theory of Rent

In the above-given figure OX – axis shows grades of land and the OY – axis shows production from A, B, C, D, grades of land. Rent of these is determined by the difference in fertility. The excess of grain from A, B, C, grade lands, over no rent land which is shown by point D. Rent is shown by shaded portion. In this way, rent is determined on the basis of no rent land.

2. Rent in Intensive Cultivation

Intensive cultivation is that cultivation in which to increase production, more and more units of labor and capital are applied on a given piece of land. When more and more units of labor and capital are applied on a given piece of land, the law of diminishing returns operates. Therefore, each additional dose of labor and capital will produce less compared to the previous dose. The doses of labor and capital whose marginal cost is equal to marginal produce are called Marginal Dose. All doses prior to it are called Intra-marginal Dose. Whereas, the rent is the difference between the produce of intra-marginal doses and marginal doses.

Determination of rent can be explained with the help of this table and diagram.:

Land Labour & Capital Production Price Rent
2 1 10 4 6
2 2 8 4 4
2 3 6 4 2
2 4 (Marginal Dose) 4 4 0

In this figure, OX-axis shows units of labor and capital and the OY-axis shows production. 4th unit of labor and capital gets no rent. It is called a marginal dose.

Criticism of Ricardian Theory of Rent

The Ricardian Theory of Rent has the following criticisms:

1. There are no Original & Indestructible Powers of the Soil

According to this theory, rent is paid for the use of the original and indestructible power of the soil. But critics say that soil has no original and indestructible power.

2. Historically Wrong

The Ricardian theory is based on the assumption that the best soils are cultivated first. But it is historically wrong. Historical facts say that first of all people will cultivate that land which is easily accessible and which is near to mandis (big market) or towns.

3. Wrong assumptions of No-rent Land

For an explanation of his theory, Ricardo assumes no-rent land. But according to critics, no rent land does not exist in our practical life. In highly populated areas, even the inferior land also gets some rent.

4. Rent arises due to scarcity

The Ricardian theory is based on the assumption that rent arises because lands differ in fertility. But it is not true. Rent arises not because of the fertility of land but because the land is scarce in relation to its demand.

5. Rent also arises in the Short Run

This theory is only applicable in the long run. It is unrealistic since rent also arises in the short run when the supply of factors is fixed.

6. Perfect competition is not Found

This theory is based on the wrong assumptions of perfect competition. But in real life, perfect competition is not found.

7. Not a  complete theory of rent

Ricardian theory only tells us how from the point of the whole economy the share of land i.e. rent is determined. But it does not tell how rent is determined from the point of view of an industry or a firm.

Conclusion

Despite these criticisms, the Ricardian Theory of Rent is very significant from a practical and theoretical point of view.


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About the author

Nikhil Agrawal

Nikhil Agrawal holds a Bachelor of Commerce (B.Com) degree and he loves to write how-to guides around Computer Fundamentals, Computer Software, Computer Programming, etc.

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