The economists like Prof Bounding, and Mrs. Joan Robinson are responsible for the development of modern theory of rent. David Ricardo holds that rent is the differential surplus i.e. it is the surplus that arises out of the difference between returns of superior and inferior grades of land. But modern economists uphold that it is the scarcity of fertile land which earns rent. The scarcity rent arises on account to the inflexible or rigid supply of land. The supply of land is different from the supply of other factors of production.
In the long period a rise in the prices of other factors causes an increase in their supply. It is the fixity of the supply of land which causes scarcity rent to emerge. But sometimes factors other than land are rigidly fixed in supply. In such a case scarcity rent may also arise from the use of these factors. Thus scarcity rent may arise not only in the case of land, but may also curve to other factors.
Modern economists are of the opinion that land is inelastic in supply. It has no cost of production thus whole of the return produced, on land goes to rent. As the supply of land is inelastic it yields rent. In the same way supply of labour, capital and entrepreneur are fixed in supply in the short period. So they also earn surplus over and above their normal earnings. This surplus is known as scarcity rent. Mrs. Joan Robinson rent arises on account of the scarcity of a factor of production in relation to demand.
Any factor of production (land, labour, capital, organization) will yield rent if their supply is inelastic in relation to its demand. In case of land the inelasticity is permanent and in the case of labour, capital and organization it is temporary. Thus rent arises due to the inelasticity nature of factors and these factors whose supply is inelastic in relation to demand, rent accrues to them. The more is the inelasticity of their supply, the more will be the: share of rent in their total earnings. Thus Marshall points out: “Even the rent is seen not a thing by itself, but as the leading species of genus.”
According to Mrs. Joan. Robinson rent is a surplus over the minimum supply price of the factor. The minimum supply price of factor is the price below which no factor is willing to off its service. Thus it is the minimum reward that a factor must get in to stay in the production. But what is seen in real life factors a reward higher than their minimum supply price. In fact this surplus represents the rent of the factor.
The factors of production of two types: (i) specific and (ii) non-specific. A specific factor has single use but a non-specific factor has more than one use. The entire price of a specific factor constitutes rent as it has no alternative cost. But in case of non-specific factor the excess of it’s over alternative cost constitutes rent.
The concept of minimum supply price is also known as transfer earnings’. The term transfer earning refers to amount of income which a particular factor could earn in its next best use. According to the modern economist, the rent of a factor is difference between its actual earnings and transfer earnings.
Rent = Present earning — Transfer earning. It is worth noting that if the transfer earnings of a factor is then the whole of its present earnings in that use is rent, according to modern theory of rent, rent is the surplus that when the supply of land is less than perfectly elastic. From the point of view of elasticity of supply there are three possibilities.
1. If the supply of land (i) perfectly elastic the actual earning and transfer earning would be the same and there arises no surplus and hence no rent.
2. If the supply of land is perfectly elastic, the transferring will be zero. The supply of land is fixed. It has got single in such a situation the entire income surplus is rent.
3. If the supply of land is elastic but not perfectly elastic, a part of income from land is rent.