Rent, Economic Rent , Modern Theory of Rent

Economic rent:

            Economic rent is the surplus over transfer earnings. New the question is how economic rent arises? Modern economists have shown three possible situations.

a.   When the supply of factors of production is perfectly elastic, the surplus earnings of the factor is just equal to its transfer earning and hence, no economic rent,

b.   When the supply of factors is perfectly inelastic, the transfer earning of such factor is zero, all its earning is a surplus and hence all is economic rent.

c.   When the supply of factor is less than perfectly elastic, transfer earnings of factors differ, they all earn surplus of varying quantity and economic rent varies. 

Modern Theory of Rent

            Modern theory of rent does not confine itself to the determination of the reward of only land as a factor of production. Rent according to the modern concept can arise in respect of any factor of production Rent is a surplus payment in excess of transfer earning of that factor. Transfer earnings means the amount of money which any particular unit of a factor could earn in its heat best alternative use. Transfer earning care also be defined as the minimum earnings, which a unit of factor of production must be paid in order to induce it to stay in the present use, industry or occupation. In this regard, if a factor is getting less than this minimum, it will give up its present employment and shift to its neat best alternative employment. But if a factor in its present employment is earning more than minimum necessary to keep it in that employment the excess is called economic rent.

            Let us give some examples to explain the concept of economic rent or surplus, according to modern concept of rent.

            Suppose a Lecturer in economics is getting presenting Rs. 10,000/- per month from a college as salary suppose further that his next best employment can be in a bank where he can get Rs. 9,500.- in a month. If he cannot get 9,500/- in the college, he will take up job in a bank and earn that much. But since he is actually getting Rs. 10,000/- as a lecturer in a college, he is earning Rs. 500/- more than his neat best alternative employment. That is, he is earning Rs. 500 as economic rent.

            Talking own their example, suppose, a piece of Land is used to the cultivation of cane in which the owner of land is earning Rs. 150,000/- If in the next alternative i.e. cultivation of cotton. It can produce Rs. 12,000/- then in its present use it is earning Rs, 3,000/- more than its transfer earning. This excess of Rs. 300 is surplus or economic rent.

            From the above examples, it is clear that economic rent is the difference between the present earning and transfer earnings. In Joan Robinson's words "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 earning necessary to induce at to its work."

            Economists like Alfred Marshall, Mrs. Joan Robinson, K.E. Boulding and so on developed the modern theory of rent.

            The two important concepts used in modern economic analysis of factor prices are the concepts of economic rent and what Marshall called transfer earning. Transfer earning is also known as opportunity cost and "Reservation price."

            Economic rent in the sense of surplus over transfer earning will arise. When the supply of the factor unit is less than perfectly elastic or not perfectly elastic. From the point of view elasticity of supply, there are three possibilities (i) When the supply is perfectly elastic (ii) When supply is perfectly inelastic & (iii) When supply is less than perfectly elastic.