The theory of economic rent was first propounded by the English classical economist David Ricardo. David Ricardo in his book “Principles of Political Economy and Taxation” defined rent as “That portion of produce of the earth which is paid to a land lord on account of the original and indestructible powers of the sil.” Ricardo in his theory of rent has emphasized the rent is reward for the services of the land which is fixed in supply. Secondly it arises due to original qualities of land which are indestructible. The original indestructible powers of the gil include nature soil fertility, mineral deposits, climatic conditions etc.
Rent under extensive cultivation:
According to Ricardo, all the units of land are not of the same grade. They differ in fertility and location. The application of the same amount of labour, capital and other cooperating resources give rise to difference in productivity. The difference in productivity or the surplus which arises on the superior unit of land over the inferior unit is an economic rent. The Ricardian Theory of rent is explained by taking an example. Let us look at the following schedule.
| Grade of Land | Yield in quintals Per Acre | Price per quintal | Total returns |
| A B C D | 50 35 20 15 | Rs. 500 Rs. 600 Rs. 700 Rs. 800 | 25000 21000 14000 12000 |
In the above schedule we assume that there are four grades of land in an uninhabited country. A grade level is more fertile than B grade land. B grade land is superior to C grade land and so is C grade land to D grade land. Following Ricardo let us assume a batch of settlers to migrate to this island. They begin to cultivate A grade land which yields 60 quintals of wheat per acre. The population of that island increases and A grade land is not sufficient to meet the food requirements of growing population. Then the people of that island brought B grade land under cultivation that yields 35 quintals of wheat per acre. A surplus of 15 quintals of wheat which arises with the same outlay on A grade land is an economic rent. B grade land being marginal land gives no rent. When owing to the pressure of growing population and a rise in demand for food. C grade land is brought under cultivation. It yields only so quintals of wheat with identical amount of labour and capital.
With the cultivation of C grade land the economic rent of A grade land is now raised to 30 quintals of wheat per acre. C grade land is no rent land as it is cultivated at the margin. If expenses of production on A grade land yielding 50 quintals of wheat are Rs. 25000 than A grade land only will be brought under cultivation. A grade land here is marginal land. If the price of agricultural produce increases (Rs. 600 per quintal) and the expenses of producing wheat on B grade land are equal to the market price of produce i.e. Rs. 21000 then B grade land which were hitherto neglected would be brought under cultivation. B grade land then become marginal land. Similarly D grade land will be the marginal land when it compensates the cultivator by giving a yield of Rs. 12000 and enjoys no surplus over cost. Marginal land is thus not fixed. It varies with the change in price of agriculture produce.
The Ricardian model is now explained will the help of diagram.
In the above figure the various grades of land in the descending order of fertility are plotted on the OX axis. The cultivated area due to pressure of population and the rising demand of food is pushed to D grade of land which is marginal land. The owner of A grade land get surplus or economic rent of 35 quintals of wheat on b 20 quintals and on C the rent is 5 quintals of wheat.
Rent under intensive cultivation:
The theory of rent which has been discussed above applies to intensive margin of cultivation. The surplus or economic rent also arises to the land cultivated intensively. This occurs due to the operation of the famous law of diminishing returns. When the land is cultivating intensively the application of additional doses of labour and capital bring in less and less of yield. The dose whose cost just equates the value of marginal return is regarded marginal or no rent dose. The rent arises on all the infra marginal dose. For example the application of first unit of labour and capital piece of land yields 25 quintals of wheat, the second dose gives 15 quintals and third dose down the 10 quintals only. The farmer applies 3 doses of labour and capital as the total outlay on the third dose equals its return. The rent when measured from the third or marginal dose is 15 quintals (25 – 10 = 15) on first dose and 5 quintals on second dose (15 – 10 = 5). The third dose is no rent dose.
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