Let us make an in-depth study of the relation between rent and price (cost).
(i) Ricardo’s View:
According to Ricardo, “rent does not and cannot enter in the least degree into price of the agricultural produce”: It is rather the result of price.
“Corn is not”, as observes Ricardo, “high because a rent is paid, but rent is paid because corn is high.” Ricardo’s view may now be explained. Under competitive conditions, the price of a product, be it an agricultural or an industrial, is equal to the marginal cost of production.
In the Ricardian analysis, the marginal cost refers to the cost of production in the marginal land. Since rent is a differential return, i.e., the differential excess of price over the cost of production, and since there is no rent on marginal land, rent is, therefore, not an element in the cost of production. It then follows that rent does not enter into price which is equal to the cost of production in the marginal land.
Instead, rent in the Ricardian system is the result of price. If the price of com is higher because of the higher marginal cost or because of a larger demand, the superior land will generate a larger surplus above cost than before. As a result, the rent will increase. Similarly, when the market price falls because of a smaller demand, the rent will fall. “Rent is thus price-determined and not a price- determining cost.” High price of the agricultural produce is the cause, and not the result, of high rent.
But this view of Ricardo is true only from the point of view of the society as a whole. In fact, Ricardo analysed the problem from this angle. From society’s point of view, land, being a free gift of nature and so having no cost of production, has no supply price. Unlike land both labour and capital have cost and supply price. Labour has to be reared; if no wages are paid, labourers will die and their supply will fall.
Similarly, capital is the result of waiting; if no interest is paid, none will be willing to lend and the supply of loan-capital will fall. But if no rent is paid, the supply of land will not be affected. Therefore, from the social standpoint, land has no cost of production. This means that the rent of land does not form a part of price. Rent is, on the other hand, the consequence of the competitive price.
(ii) Rent from the Point of View of an Individual Firm:
If we look at the problem from the point of view of an individual farmer, the whole of rent is very much a part of the total cost of production. The rent that it pays for land is included in its costs of production, because the fanner cannot use the land if it does not hand over to the owner the surplus appearing over expenses for other factors. So rent enters into cost and price.
(iii) Single Use Vs. Multiple (or Alternative) Uses of Land:
Again, what Ricardo has said will be true if a particular land has a single use only, say, for the cultivation of wheat. The marginal land for wheat may not yield any rent if it is exclusively used for wheat. But the land can be used for a variety of purposes, i.e., generally, it has alternative uses. The same plot of land may be used for either jute or paddy or oilseeds or cattle-grazing.
When it is used for, say, wheat, the farmer must pay rent, otherwise it would be transferred to the cultivation of, say, paddy or jute, from where it can earn rent. Here rent becomes a part of cost and price of the product of land. The rent which the fanner has to pay on the marginal land is paid not as marginal land but because of transfer costs. It happens so because the total of land is inelastic in supply for all uses, but is elastic in supply for a particular purpose.
(iv) Transfer Earnings or Opportunity Cost:
The modern writers interpret rent as the surplus over the minimum supply price of a factor. As land can be put to various alternative uses, the cost of land to a particular use depends on the highest income that it can earn from its next-best use.
When this opportunity cost increases, the owner of land will demand more and get more from its present use. The increase of rent in such cases would affect the prices of all products from land. Rent in this sense enters into price, and high price may be the result of high rent.
From this point of view of transfer cost, land has a cost to an individual farmer. Unless the latter pays the rent per acre which is determined by competition among landlords as also among farmers, the land will go to someone else. Hence, for the individual farmer, the whole of rent will be a cost—the cost of keeping the land from being transferred elsewhere.