Meaning of Rent
In common language, the word ‘rent’ refers to any periodic payment made for the use of a good. For example, we pay rent for houses, shops and the like. This rent may be called contract rent. But, in economics, the word ‘rent’ refers to the payment made for the use of land as such. Economic rent differs from contract rent. Suppose we pay rent for a house. This (contract) rent includes besides economic rent, interest for the capital invested in the construction of the house, wages and profit. Rent arises on account of the peculiar characteristics of land, namely that its supply is inelastic and it differs in fertility. So, one of the important conditions for the emergence of rent is the inelasticity of the supply of a factor. This is particularly true of land. Another point we have to note here is that rent arises on account of differences in the fertility of land. And lands are not of equal fertility. Only those lands which are more fertile than others get rent.
Modern Theory of Rent
According to the modern theory of rent, the term ‘rent’ is applied to “payments made for factors of production which are in imperfectly elastic supply”. Thus, the term ‘rent’ includes besides payment for the use of land, other payments for labor and capital as well. Rent does not apply to land alone. Just as land differs in fertility, men differ in their natural abilities. Men of superior ability will earn a very large income in their occupation. For example, a surgeon with rare skill may get a very large income. There is an element of rent in it. It represents rent of ability. In fact, there is a theory of profits known as the “Rent Theory of Profits”. Again, we can speak of rent with reference to man-made appliances too. Professor Marshall has introduced the concept of ‘quasi-rent’ with regard to machines and other man-made appliances. So the modern trend is that rent can be applied to all factors of production.
The condition for the emergence of rent is that the supply of a factor should be inelastic in relation to the demand for it. Scarcity is another thing that gives rise to rent. Further, modern economists make use of the term ‘transfer earnings’ to explain rent with reference to a particular industry. Transfer earnings refer to the amount that a factor could earn in its best paid alternative employment. According to J.L. Hanson, “any payment in excess of this amount is a surplus above what is necessary to retain the factor in its best-paid employment and so is rent.” For example, let us assume that one acre of land is used for the cultivation of paddy and it gets an income of $300 per year. If the same land is used for the cultivation of sugar-cane, it may get an income of $200. In the present case, the transfer earnings of the land are $200 and rent is $100.
What is Quasi-rent?
The concept of quasi-rent has been introduced in economics by Marshall. According to him, “quasi-rent is the income derived from machines and other appliances for production made by man.”
In economics, the term rent is generally used to denote the income from factors whose supply is permanently inelastic. Land is the main example of such a factor. Its supply is fixed both in the short-run as well as in the long-run. In the short-run, the supply of machines and other man-made goods is also inelastic. Suppose there is an increased demand for machines. In the short-run, the supply of neither land nor machines can be increased to meet changes in demand. So in the short run, whenever there is a rise in demand for machines and other man-made appliances, they will earn something similar to rent. This surplus income which is earned by machines in the short-run and which will disappear in the long-run has been described as quasi-rent. The difference between land and man-made appliances is that the supply of land is permanently fixed while that of the latter is fixed only in the short-run. In the long-run, the supply of machines and other man-made goods can be adjusted to meet changes in demand.
For example, suppose the demand for fish increases during a given period. It means an increase in demand for boats and nets. But the supply of boats and nets cannot be increased immediately. So for sometime they may earn some extra income similar to rent. If demand for fish continues to remain at the higher level, in course of time, new boats and nets will be produced and their supply will be adjusted to changes in demand. Incomes from boats and nets will once again fall to the normal level. Then quasi-rent disappears.
Thus, the increase in incomes of machines and other man-made appliances over a short period is known as quasi-rent. It is rent because it is income from a factor whose supply is fixed and it is ‘quasi’ because the inelasticity of supply is a temporary feature and the rent that arises out of such a condition is only a temporary phenomenon.
© 2013 Sundaram Ponnusamy
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affan on May 16, 2015:
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Natarajan on February 25, 2015:
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dede on November 09, 2014: