Relationship between Rent and Price of the Crop | Economics

The upcoming discussion will update you about the relationship between rent and price of the crop.

(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 high,” as observes Ricardo, “because a rent is paid but rent is paid because corn is high”.

The argument in favour of this view may be summed up as follows:

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 marginal land does not pay any rent, rent is, there­fore, not an element of the cost of production of the marginal land. It then follows that rent does not enter into price which is equal to the cost of production in the marginal land.

Rent is on the other hand, at least, in the Ricardian system, is the result of price. If the price of corn is higher because of the higher marginal cost or because of a larger demand, the superior land will get a larger surplus 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 community as a whole. In fact, Ricardo analysed the problem from this angle. Form the point of view of the community as a whole, 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. Land, therefore, from the social standpoint, has no cost and so 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 firm, the whole of rent is as much a part of the total cost of production as any other item of its expense. The rent that it pays for land or building is included in its costs of production.

Rent is a cost to the firm because the firm will not obtain the service of land if it does not hand over to the land owner the surplus left at the end after making all other factor payments. Farmers or businesspeople compete with one another for the use of the land or of the urban site, until the price paid for it is equal to the surplus that is generated land after covering all costs 1 bus, 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 only. 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 or industries, 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 fanner 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 produce. The rent which the farmer has to pay on the marginal land is paid not as marginal land but because of transfer uses.

Thus, while land on the margin of cultivation pays no rent, land on the margin of transference does pay rent. It is so because the total of land is inelastic for all uses, but is elastic in supply for a given purpose, or for a given industry.

(iv) The Transfer Earnings or the Opportunity Cost:

That rent is regarded as cost is based on the modern concept of rent. 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 alternative.

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. In this sense, rent enters into price, and high price may be the result of high rent.

This transfer cost is taken into consideration; land has a cost to an individual farmer. Unless the latter pays the rent which is determined by competition among both landlords and competitive 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 transferring to some other use or someone else.

Conclusion:

Thus, it is found that, although in the Ricardian system rent does not enter into cost and price, in the modern analysis it is a part of cost. These two views may appear to be conflicting but are not irreconcilable, for Ricardo considered the problem from the standpoint of the indi­vidual firm or the individual farmer or the economy as a whole by the modern writers have looked at this problem from the standpoint of the individual firm or the individual farmer or the particular use of land. For this reason, Samuelson observes, “Whether rent is or is not a price-deter­mining cost depends upon the viewpoint from which we look at it.”