The Circadian theory of Rent explained. David Ricardo, a notable British economist gave his view on the theory of rent which is popularly known as differential rent. According to him Rent is the price paid for the use of land.
David Ricardo, a notable British economist gave his view on the theory of rent which is popularly known as differential rent. According to him Rent is the price paid for the use of land. A piece of land is used because it has fertility. All the land can not he said to have equal fertility. They differ in fertility.
This difference in fertility, according to him, gives rise to rent. As rent arises due difference in fertility, his theory of rent is known as differential rent. A superior piece of land yields surplus over a less fertile land, surplus over inferior land is known as Rent. Thus according to David Ricardo Rent is differential surplus. According to David Ricardo fertility is quality which inherent in land. It is there with land. No human effort can decrease the element of fertility from land.
Ricardo defined Rent as “that portion of the product of the earth which is paid to the landlord for the use of original and indestructible power of the soil”. From the above definition it is known that rent is the price for use of land. It is paid to the owner land. Land gets rent because of its non-delaying powers Thus rent arises due to the difference in the fertility or productivity of various grades of land and due to locational differences.
Assumptions of the theory:
(1) Supply of land is fixed. Quantity of land cannot be increased or decreased. Thus the elasticity of supply of land is zero.
(2) Fertility of soil is an inherent quality. This quality cannot be destroyed. It is purely original.
(3) Cultivation of land is done in order of their fertility.
(4) The law of diminishing return or increasing cost operator in agriculture of land.
(5) Lands differ in fertility. In other words lands arc heterogeneous.
(6) Land is assumed to be a free gift of nature.
(7) The law is based on the assumption of perfect competition.
(8) The law is based on the assumption of long run.
(9) Marginal land covers the cost of production and hence it yields no rent.
Explanation of theory:
In order to explain the emergence of differential rent with the help of above assumptions. David Ricardo gave an imaginary example of a newly inhabited Island. A group of people go to settle there. In that land there are plenty of lands of different fertility. In order of fertility, there are three different grades of land i.e. A.B.C. They started cultivating ‘A’ grade land produces 25 tons of foodgrain. When the demand for foodgrain increases due to rise in population, people took the ‘B’ grade land to cultivation.
Suppose ‘B’ grade land produces 20 tons of foodgrain. Land A is the intra-marginal land. The difference of produce between the marginal land and infra-marginal land is called rent. If r some reason or the other demands for foodgrain increases, people will start cultivating ‘C’ grade land which is the least productive land. Suppose it yields 10 tons of foodgrain. Since ‘C’ grade land is the last piece of cultivation, it is called ‘marginal land’. A and B grades of land are called intramarginal land. Grade A and B are entitled to earn surplus over ‘C’ grade land. Their surplus over ‘C’ grade land is nothing but the rent.
From the above table A and B grades of land yield rent to tune 15 and 10 tons of foodgrain and Rs.150 and Rs.100 in monetary form. The price Rs.10 per ton is determined by the cost cultivation of ‘C’ grade land. If the minimum cost is not reaped, body will cultivate C grade land. ‘C’ grade land yields 10 tons foodgrain and the cost of cultivation is Rs.100.
The minimum price per one ton is Rs.10. A Grade and B grade lands yield rent the difference arises because of their fertility. C grade rent experiences no surplus and hence it yields no rent. That is why Ricardian theory is’ know as differential rent theory. The rent, according to Ricardo, is unearned surplus.
In the figure given above OX-axis measures various grades land and OY-axis represents produce in tons. The amounts of rent earned by A and B grades of land are shown by the differently shaded areas. ‘C’ grade land just covers its costs. So it is called No-rent land’.