What is Economic Rent?

(i) Differential Rent or Rent as Differential Payment: This concept has been explained by David Ricardo and other classical economists. According to them all lands are not equally fertile or equally well-situated. Different types of land have different fertility and different situations with the result that the more fertile and more favourably situated land, called as superior land, enjoy an advantage over the less fertile and less favourably situated land, generally called as the inferior land. With the same amount of labour and capital, the superior plot of land will give greater production than the inferior land. This difference in the yield between the superior land and the inferior land, according to Ricardo, is rent which accrues to the landlord. Such a rent arises because of the difference in fertility, climate and situation of different lands. According to Ricardo, "Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original indestructible powers of the soil".

(ii) Scarcity Rent According to modern writers economic rent is not only a peculiarity of land alone, other factors of production like labour and capital also derive such rent. Economic rent arises because of the scarcity of factors of production. According to modern economists rent arises because the supply of the factors of production is not perfectly elastic but is less than perfectly elastic. If the supply of a factor of production is perfectly elastic, any number of units of that factor can be obtained at the prevalent market price and therefore there is no question of the existence of rent. But in reality, the supply of a factor is not perfectly elastic, it is less than the perfectly elastic. As a result, while certain number of units of a factor are available at the prevalent market price, but with a rise in the demand for the factor, the additional units are obtained only at a higher price. The excess of income obtained by the factor is rent. The modern writers speak of rent as an economic surplus. It is surplus which accrues to a factor over its minimum supply price.