Let us make an in-depth study of Rent in Economics:- 1. Meaning and Definition of Rent 2. Types or Forms of Rent.
Meaning and Definition of Rent:
The term ‘rent’ literally means a certain amount of money paid for the hire of some consumers durable such as room, air conditioner, house or building etc.
But in economics the term is used in different sense, it refers to the whole or a part of the earning of some factors of production land as well as other factors.
In other words we can say that “rent” is the payment for the productive use of land. But modern economists have given it a broader connotation by defining it as the surplus earned by a factor over and above the minimum earnings necessary to induce it to continue its work.
1. According to Ricardo – “Rent is that portion of the produce of the earth which is paid to the landlord for the use of original and indestructible powers of the soil.”
2. Carver has said – “Rent is the price paid for the use of land.”
3. According to Prof. Marshall – “The income derived from the ownership of land and other free gifts of nature is commodity called “Rent” in economics.
4. Mrs. Joan Robinson has said – “The essence of the conception of “Rent” is the conception of a surplus earned by a particular part of a factor of production over and above the minimum earnings necessary to induce it to do its work.”
5. According to Boulding – “Economic Rent may be defined as any payment to a factor of production in an industry in equilibrium which is in excess of the minimum amount necessary to keep that factor in its present occupation.”
On the basis of the definitions written above it can be said that land contains original and indestructible powers and for that the landlord receives some remuneration which is called Rent. But modern economists are of this opinion that rent is not confined to land and other free gifts of nature alone but to all factors of production, when they are in inelastic supply. When any factor is in less than perfectly elastic supply, it yields a surplus amount of that surplus the Rent is paid.
Types or Forms of Rent:
Rents are of following types:
1. Gross Rent.
2. Contract Rent.
3. Economic Rent.
4. Scarcity Rent.
5. Quasi Rent.
(1) Gross Rent:
In ordinary language rent refers to the compensation paid for the use of some body’s belongings for a period of time, i.e., rent paid by tenant to landlord or to the owner of the house.
Under this besides the net or economic rent following are also included:
1. Interest on Capital:
To improve the fertility of land the landlord spends money over the land. The capital which the landlord invests, he charges some money as interest. Thus, rent includes a part of interest of capital.
2. Reward for Management:
Landlord invests money over the management of the land and in its care. The expense incurred is also included in the Gross Rent.
3. Reward for Risk:
Landlord takes risk by investing money on land and over its management, therefore the expenditure and the risk amount is included in Gross Rent.
4. Economic Rent:
Economic Rent is a part of Total Rent. This is paid for the use of land. Economic Rent is also called Net Rent.
Therefore, Gross Rent = Interest on Capital + Remuneration for Risk + Expenditure on management + Economic Rent.
(2) Contract Rent:
Contract Rent is a commercial rent referring to a periodic payment for the use of something. It is a contractual payment over a stated period of time. It is a gross rent. It being gross rent includes economic rent, or pure rent, plus other elements etc., interest on capital, service charges, profit etc.
The rent of a hotel room is gross rent as it includes Compensation for the use of land or ground, interest on capital invested, wages for management and other services and profit for the risk involved. Thus,
Contract Rent = Gross Rent = Pure Rent + Wages + Service Charges + Depreciation Charges + Profit + Interest.
Contract Rent is just like price, determined by the interaction of demand for the rented goods and their supply. In actual practice, rent is always a contract rent.
(3) Economic Rent:
The modern economists consider that the Economic Rent is not only concerns with land alone but it is applicable to all the factors of production.
According to them:
“There exists rent element in the earning of the every factor of production and it is identified with surplus income.”
The definition of economic rent has been given by Prof. (Mrs.) Joan Robinson, Vilfredo, Pareto, Ricardo and Penson as under:
1. Joan Robinson – “The essence of the conception of rent is the conception of surplus earned by a part of a factor of production over and above the minimum earning necessary to induce it to do work.”
2. According to Ricardo – “Bent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.”
3. According to Pareto – “The Economic Rent is the excess payment to a factor over and above the minimum necessary to keep a factor in its present occupation.”
4. According to Penson – “It means the surplus which remains to the cultivator after he has paid all the expenses of production and has remunerated himself for his own productive efforts. In this sense, it is the excess of the crop over expenses,” Therefore,
Economic Rent = Total Rent – Interest on Capital – Management Expenses – Reward for Risk.
The modern economists have explained the problem of rent determination with reference to the following situations:
(i) Specificity of the factors of production,
(ii) Scarcity of the factor of production.
(4) Scarcity Rent:
Scarcity rent is that rent which is paid by all lands including the marginal land. The modern concept of rent is scarcity rent. Rent arises when there is scarcity of land due to increase in demand. Rent is based on the scarcity of the availability of land—it is immaterial whether it is of superior or inferior or any other quality. Rent emerges even if they are scarce in relation to demand. To explain this point let us assume that all land is homogeneous and specific in use, but in scarce on account of its rigid supply.
In any period, whether long or short, the supply of land in existence is perfectly inelastic. Thus, the rise in the demand for land, with the growth of population, will intensify its relative scarcity, so the price of land, i.e., rent, tends to rise further and further with the rise in demand.
The term ‘Quasi-Rent’ proposed by Alfred Marshall, refers to a short period phenomenon. He has said that—”all earnings caused by temporary scarcity in the supply is called Quasi-Rent.” It is the earnings of a factor of production like—machinery, equipment etc. whose supply is inelastic in the short-run, but not in the long-run.
According to Stonier and Hague:
“The quasi rent of a machine is its total short-period receipts less the total costs of hiring the variable factors used in association with it to produce output, and of keeping the machine in running order in the short-run.” Thus, in the short-run, any returns earned by the use of a machine in excess of the prime costs or variable costs of running it can be regarded as quasi-rent.
Further, according to Prof. Alfred Marshall:
“Quasi-rent of a machine is nothing but its total short-run receipts minus the cost of hiring the variable factors used with it and also of the keeping machine in running order in the short-period.” Thus, quasi rent is a surplus earned by a machine in the short-period over its running cost. This surplus shows by how much the short-run earnings of a machine exceeds the short-run cost of maintaining it.
We can understand the concept of quasi rent in a better way by taking the example of shipping during World War I. As a result of the war, there was a sudden increase in the demand for shipping, but the supply could not keep pace with it because new ships could not be produced overnight. There was, thus, an acute shortage of shipping.
The shipping freight charges went up. The old and the discarded ships were also brought into use. They also started yielding income. The ships which were already in service were more intensively utilised. Income from these ships greatly increased. In this way, the ships earned a surplus over their normal income.
These surpluses were given the name of quasi rent. This additional income of ships was due to the fact that their supply was fixed in the short-period. In the long-period more ships were constructed, the supply of shipping increased, and as a consequence, shipping charges came down in the long period. The additional income earned by the ships during the initial years of the war now comes to an end. Quasi rent disappeared.
Features of Quasi Rent:
Important features of quasi rent are as follows:
1. Quasi rent is a surplus-income.
2. It is a differential income which arises in the short-period.
3. It arises on the man-made machinery and equipment.
4. It arises because the supply of man-made capital goods is inelastic in the short-period.
5. It disappears in the long-period.