Economics

How All Rents Are Differential Rents and Scarcity Rents

Difference between Differential Rent and Scarcity Rent

Several economists stated that rent is the price or reward paid to land for using it in production of goods. But economists differed in their opinion regarding whether rent arises on all factors. Broadly speaking economists expressed two divergent opinions in this regard. The classical economists including David Ricardo considered that rent arises on land only. But the modern economists like Mrs. Joan Robinson considered that rent arises on all factors besides land.

David Ricardo and other classical economists viewed that rent is a differential surplus. According to them rent arises due to the differences in the fertility of land. They classified lands into superior grade lands and inferior grade lands. They attributed rent only on superior grade lands. The cost of production on superior lands is less when compared to that of the interior lands. The price paid to the inferior grade lands just covers the cost of production. But the price paid to the superior lands will be more than the cost of production incurred on them. As a result, superior lands get a surplus over and above their costs. The classical economists considered that surplus as rent. Hence they stated that all rents are differential rents.

The modern economists expressed different views regarding the nature and causes of rent. They rejected the classical view that rent arises due to the differences in the fertility of land. They argued that rent also arises in the case of lands having same qualities. They emphasized that it is not the element of heterogeneity of land but it is the scarcity of land in relation to its demand that determines the rent on land. The total supply of land used for several purposes is inelastic. So rent arises due to the scarcity of land.

Ricardo and other classical economists attributed rent on land only. But the modern economists considered the rent arises on all factors of production. Any factor which has scarcity in relation to its demand gets rent. So rent element exists in all factors. This is further explained in the following paragraphs:

Rent element in wages : The labourers differ from one another in their ability, caliber and skills. So skilled and efficient labourer receive more wages when compared to the unskilled and untrained labourers. When demand for skilled labourer increases, the supply of a skilled labour of a particular type cannot be increased immediately. So it takes sometime for the labourers to improve their skills. Meanwhile the existing labourers earn more income. This is scarcity rent in the wages.

Rent element in profits : Rent element is observed in the case of profits. Entrepreneurs differ in their efficiency and caliber. The more the efficiency of an entrepreneur, the higher will be his earnings. So dynamic, risk taking and uncertainty bearing entrepreneurs get more surplus earnings when compared to the inefficient entrepreneurs. As the able and efficient entrepreneurs are limited, the existing few entrepreneurs get surplus earnings. This surplus earning is the scarcity rent in profits.

Rent element in capital : Rent element is also found in capital. In an industry latest machinery earn more income than outdated machinery. When the demand for a particular type of machinery and other capital goods increases, it is not possible to produce and install them immediately in the industry. It takes sometime to increase their supply. In the meanwhile the existing machinery is paid with higher income. Hence this surplus income on machinery is called rent in capital. Thus, rent is obtained by all the factors. It is not limited to land only. All rents are in a way differential rents and all rents are scarcity rents.

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