discuss the modern theory of rent
Answers
Answer:
According to modern theory, economic rent is a surplus which is not peculiar to land alone. It can be a part of income of labour, capital, entrepreneur. According to modern version rent is a surplus which arises due to difference between actual earning and transfer earning.
Rent is a surplus. In the sense of surplus, rent is a payment in excess of transfer earnings. Transfer earnings mean the amount of money which any particular unit could earn in its next best alternative use.
Modern theory of rent does not confine itself to the reward of only land as a factor of production.
Rent in modern sense can arise in respect of any factor of production, and not merely land. Rent is a surplus. In the sense of surplus, rent is a payment in excess of transfer earnings.
Transfer earnings mean the amount of money which any particular unit could earn in its next best alternative use. Suppose a piece of land under cotton is yielding Rs. 150 and its next best use wheat fetches Rs. 100. The transfer earnings are Rs. 100 and, therefore, in its present use it is giving a surplus of Rs. 50.
We can also define transfer earnings as the minimum sum which must be paid for a unit of a factor of production in order to induce it to staty in its present use or employment. In the above example, a sum of Rs. 100 at least must be paid for the land under cotton in order to retain it under cotton; otherwise it will shift to wheat, which is its next best alternative use where it can fetch Rs. 100. Actually, this piece of land is earning Rs. 150, i.e., Rs. 50 extra or in excess of its transfer earnings. This is economic rent. Economic rent in this sense is thus the difference between the present earnings and the transfer earnings.
This concept of rent is applicable not merely to land but also to all factors of production i.e. labour, capital and entrepreneur’s earnings too. They can all earn economic rent in the sense that the modern economists use the term ‘rent’.
How Rent arises:
Rent in the sense of surplus arises when the supply of land, or for that matter that any other factor service, is less than perfectly elastic.