Rent: Definition and Types of Rents

In simple words, ‘ rent’ is used as a part of the produce which is paid to the owner of land for the use of his goods and services.

But, in economics, rent has been differently defined from time to time.

Thus rent refers only to make payments for factors of production which are in imperfectly elastic supply. For instance, it is the price paid for the use of land.

Definition of Rent:

The concept of rent has been defined as follows:

“Rent is that portion of the produce of earth which is paid to landlord for the use of original and indestructible powers of the soil.” -Ricardo

“Rent is the income derived from the ownership of land and other free gifts of Nature.” He further called it ‘Quasi Rent’ which arises on the manmade equipment’s and machines in the short period and tend to disappear in the long run. – Marshall

“Rent is the price paid for the use of land.” –Prof. Carver

Economic rent is also termed as surplus as it is received by landlord without any effort. Prof. Bounding termed it as “Economic Surplus.” Moreover, modern economists comprising of Mrs. Joan Robinson, Boulding etc. opined that part of the income of each factor can be rent.

Income alone received by land cannot be rent. It is so because different factors have different uses. As such, each factor will be used for that purpose in which its income is maximum. Opportunity cost of a factor for its use in the work yielding maximum income is the price of output that the factor concerned can earn by working in next alternative use.

Definition of Economic Rent:

The definitions of economic rent can be grouped into two parts as:

Classical Definitions:

“Economic rent is the payment for the use of scarce natural resources”. – Jacob Oser

“Economic rent is that portion of a landlord’s income which is attributable to his ownership of land.” – Anatol Murad

Modern Definitions:

“Economic Rent may be defined as any payment to a factor of production which is in excess of the minimum amount necessary to keep the factor in its present occupation.” – Boulding

“Rent is the difference between actual payment to a factor and its supply price or transfer earnings.” – Hibdon

Types of Rent:

The main types of rent are as under:

1. Economic Rent:

Economic rent refers to the payment made for the use of land alone. But in economics the term rent is used in the sense of economic rent. In the words of Ricardo and other classical economists, economic rent refers to the payment for the use of land alone It is also called Economic Surplus because it emerges without any effort on the part of landlord. Prof. Boulding termed it “Economic Surplus”.

2. Gross Rent:

Gross rent is the rent which is paid for the services of land and the capital invested on it.

Gross rent consists of:

(1) Economic rent. It refers to payment made for the use of land.

(2) Interest on capital invested for improvement of land.

(3) Reward for risk taken by landlord in investing his capital.

3. Scarcity Rent:

Scarcity rent refers to the price paid for the use of the homogeneous land when its supply is limited in relation to demand. If all land is homogeneous but demand for land exceeds its supply, the entire land will earn economic rent by virtue of its scarcity. In this way, rent will arise when supply of land is inelastic. Prof. Ricardo opined that land was beneficial but it was also scarce. Productivity of land was indicative of the generosity of nature but its total supply remaining more or less fixed symbolized niggardliness of nature.

4. Differential Rent:

Differential rent refers to the rent which arises due to the differences in the fertility of land. In every country, there exists a variety of land. Some lands are more fertile and some are less fertile. When the farmer’s are compelled to cultivate less fertile land the owners of more fertile land get relatively more production. This surplus which arises due to difference in fertility of land is called the differential rent. This type of rent arises under extensive cultivation. According to Ricardo, “In order to increase production on same type of land, more units of labour and capital are employed.”

5. Contract Rent:

Contract rent refers to that rent which is agreed upon between the landowner and the user of the land. On the basis of some contract, which may be verbal or written, contract rent may be more or less than the economic rent.