Difference between Differential Rent and Scarcity Rent

This article will help you to learn about the difference between differential rent and scarcity rent.

Difference between Differential Rent and Scarcity Rent

1. Rent as stated by Ricardo is a differential surplus in the sense that a more fertile or super marginal land earns a surplus of revenue over its costs.

It is a surplus over the earnings of marginal land, since marginal land earns a revenue just to cover its costs. So, it earns no rent, because rent is a surplus over the cost. But modern economists are of this opinion that rent is a differential surplus in the sense of a difference between the actual earnings and transfer earnings of a factor of production.

2. Next, it has been said that any factor which earns such a differential surplus i.e., rent, so long as its supply is less than perfectly elastic. But Ricardo has said that a more fertile land earned a differential rent because of its greater productivity. The concept of scarcity rent, however implies that rent of land arises on account of scarcity. But Ricardo did not consider the thought of scarcity.

3. Modern economists, considers that since the supply of land is fixed, irrespective of its fertility, there is a scarcity of land. Therefore, rent tends to rise with the increase in demand.In short, it can be said that scarcity rent is demand determined.

Ricardo, on the other-hand, attributes rent only to land as a factor of production. Modern economists, however, take a broader view and regard that rent can be earned by any factor of production (and not confined to land alone), so long as its supply is less than perfectly elastic i.e., scarcity of the factor remains.

4. Land earns differential rent, or scarcity rent for ever, as the differences in the fertility or scarcity are permanent, while the other factors can only be temporary as their scarcity is only temporary.

Important difference between the Ricardian Theory of Rent and the Modern Theory of Rent are as follows:

1. Ricardian theory of rent is the return for the original and indestructible powers of the soil. But the modern theory of rent is surplus earned by any factor of production not necessarily land, over and above the minimum earnings necessary to induce it to do its work.

2. In Ricardian theory, rent is due to differences in fertility and situation. While in modern theory it is due to scarcity or specificity.

3. In Ricardian theory, Rent is a surplus above the marginal or no rent-land. While in modern theory it is the difference of actual earnings and transfer earnings.

4. Ricardo says—”Rent does not enter into Price” while modern economists are of this opinion that rent enter into price.”

5. In Ricardian theory, production of land is the important basis of determination of rent while in modern theory power of demand and supply plays an important role.

6. Ricardo theory is based on various assumptions while modern theory is not based on any assumptions.