In this article, we will explain how the Modern Theory of Rent is an amplified and modern form of the Ricardian Theory of Rent. Modern economists have amplified and modified the Ricardian Theory of Rent into the following ways:
Amplified From Ricardian Theory of Rent
According to Ricardo, rent is paid for the use of ‘original and indestructible powers of the soil.’ In other words, rent is a payment made for the use of land only.
According to modern theory, rent is not limited to land only but other factors like capital, labor, an entrepreneur may also get rent. It means rent is not peculiar to land alone, it arises in case of all factors. The reason being that the supply of factors is scared with its demand. It can be a part of the income of each factor of production.
Modified Form of Ricardian Theory of Rent
The modern theory of rent is considered a modified form of the Ricardian Theory of Rent due to the following reasons:
- Measurement of rent
- Causes of the emergence of rent
- The relation between rent and price
1. Measurement of Rent
In Ricardian theory, rent is measured by the difference between the producer of intra-marginal land and produce of marginal land.
According to Ricardian, marginal land is no rent land. But in the real world, no such land exists. In this way, rent cannot be measured. But according to modern theory, rent is measured by the difference between actual earning and transfer earning. It is possible by the difference between the actual earning of the factor.
Therefore, the modern theory is a modified form of the Ricardian Theory of Rent.
2. Causes of the Emergence of Rent
According to Ricardo, rent is a differential surplus enjoyed by superior land over inferior land. Similarly, due to the operational of diminishing returns on land, intra-marginal doses of capital and labor earn a surplus over marginal dose.
But modern economists consider it, the result if scarcity and specificity of factor. It arises due to the scarcity of a factor with its demand. Thus, modern theory gives more scientific reasons for the emergence of rent.
3. The Relation Between Rent and Price
In Ricardian views, rent does not enter into the price, it means it does not affect the price. It is the price that influences rent. But modern economists consider it not completely true. They have three views regarding the relation between rant and price. From point of view of the economy, rent does not enter into price. It means it does not affect the price. But for an individual firm, rent is part of the cost so, it influences price.
Thus, the modern theory of rent is more comprehensive, logical and scientific. Thus, the Modern Theory of Rent is an amplified and modern form of the Ricardian Theory of Rent.
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