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Rent Ricardian Theory
The Ricardian theory of rent follows from the views of classical writers about the operation of law of diminishing returns in agriculture. Classical authors, West, Torrents, Malthus and Ricardo, each of them independently formulated the theory of differentiated rent. However, the classical theory of rent in the form presented and elaborated by David Ricardo has become more popular, though the ideas of all over concerning the rent are fundamentally same. Ricardo gave credit to the West and Malthus as his forerunner in the development of the theory of rent.
Ricardo defined rent as follows: rent is that portion of the produce of earth which is paid to the landlord for the use of the original and indestructible powers of soil. It should be noticed that land rent, according to Ricardian definition, is a payment for the use of only land and is different from contractual rent which includes the return on capital investment made by the landlord in the form of hedges, drains, wells and the like. When return on the capital is the price for use of only land or “the original and indestructible powers of the soil.”
Assumptions of Ricardian theory
It will gently help in the understanding of the Ricardian theory of rent determination, if we clearly state the various assumptions made by him. Firstly, Ricardo considers the supply fixed. No amount of the viewpoint of the whole society and takes the quantity of land as completely fixed. Thus the total supply of higher price for the use of land cans forth an increased supply of it. Secondly, it does not take into account the various alternative uses to which land can be put. He assumed the land to be completely specific to one growing a single composite crop corn. Thus land has taken to be completely used for growing corn or alternatively it is left to be idle. There are only two alternative used of land: its use of growing of corn or no use at all. Thus he takes the transfer earnings of land as zero. No land owner would like to leave the land idle and therefore every land owner will be would prepared to give it for any rent however little it may be provided that perfect competition prevails.
Thirdly, he assumes that land differs in quality. There are various grades of land, differing from each other in respect of fertility and location. Some pieces of land are more fertile than others and, as compared to others, some are more well located or near to the markets centres.
Fourthly, he assumes that there is perfect competition in the market for land. In other words, there are many land owners who are to give their land on rent and there are many farmers who are to get land on rent for the purpose growing corn. Further each individual land owner and farmer has no influence over rent, the price for the use of land.
Given the above assumptions, according to the Ricardian theory, rent arises due to two reasons. Firstly, if land is homogeneous, I.e. of uniforms quality and same location, the society of land relative to demand will give rise to rent.
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Ricardo defined rent as follows: rent is that portion of the produce of earth which is paid to the landlord for the use of the original and indestructible powers of soil. It should be noticed that land rent, according to Ricardian definition, is a payment for the use of only land and is different from contractual rent which includes the return on capital investment made by the landlord in the form of hedges, drains, wells and the like. When return on the capital is the price for use of only land or “the original and indestructible powers of the soil.”
Assumptions of Ricardian theory
It will gently help in the understanding of the Ricardian theory of rent determination, if we clearly state the various assumptions made by him. Firstly, Ricardo considers the supply fixed. No amount of the viewpoint of the whole society and takes the quantity of land as completely fixed. Thus the total supply of higher price for the use of land cans forth an increased supply of it. Secondly, it does not take into account the various alternative uses to which land can be put. He assumed the land to be completely specific to one growing a single composite crop corn. Thus land has taken to be completely used for growing corn or alternatively it is left to be idle. There are only two alternative used of land: its use of growing of corn or no use at all. Thus he takes the transfer earnings of land as zero. No land owner would like to leave the land idle and therefore every land owner will be would prepared to give it for any rent however little it may be provided that perfect competition prevails.
Thirdly, he assumes that land differs in quality. There are various grades of land, differing from each other in respect of fertility and location. Some pieces of land are more fertile than others and, as compared to others, some are more well located or near to the markets centres.
Fourthly, he assumes that there is perfect competition in the market for land. In other words, there are many land owners who are to give their land on rent and there are many farmers who are to get land on rent for the purpose growing corn. Further each individual land owner and farmer has no influence over rent, the price for the use of land.
Given the above assumptions, according to the Ricardian theory, rent arises due to two reasons. Firstly, if land is homogeneous, I.e. of uniforms quality and same location, the society of land relative to demand will give rise to rent.
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