There is a controversy in the
ricardian theory of rent whether rent enters
into the price of the produce or not. Ricardo is of the view that rent does not
form a part of the price of agricultural production. It is the result of price.
As price rises, more and more units of the inferior kind of land are brought
under cultivation. This enables the owner of superior kind of land to earn a
differential surplus. Rent is, thus, not a price, determining factor but it is
price which determines rent.
Example:
For instance, the cost of production of wheat per
quintal in A, B, C and D grades of land is $30, $40, $50 and $60 respectively.
Let us suppose that the price of wheat in the market is $40 per quintal. At
this price only A and B grades of land will be brought under cultivation. The
owner of A grade land will earn a surplus of $10 per quintal. If due to
greater demand of wheat, price rises to $50 per quintal in the market, the
owner of A grade land will earn $20 as rent and the owner of B $10, and
the C grade land will be no-rent-land.
If price happens to rise to $60, then
D grade land will be cultivated and the rent per quintal of wheat for A, B and C
grades of land will be $30, $20 and $10.
Thus, we conclude, that higher the
price, the higher is the rent and wee versa.
In the words of Ricardo:
"Corn is high, not because rent is
paid, but rent is paid because corn is high".
Or, in other, words, we can any that
the prices of commodities are not high because the rents are high. The correct
statement would be that rents are high because prices are high. Rent in brief is
price determined and not price determining.
Modern View:
The modern economists, however, do not agree with the above view of Ricardo
that rent does not enter into the price of land. They say that this inclusion
(rent not entering into price) is valid only if we took at land from the point of view of the community as a whole; Ricardo did not consider the
question of rent payment from the point of view of a single industry or in
particular use. If we look at rent from the point of view of particular use,
rent does become a part of price. This is evident from the concept of transfer
earnings. A plot of land, as we know, has an alternative uses. It can be used
for growing wheat, cotton, rice, sugar-cane, maize, etc. If it is put to one
use, it cannot be used for any other purpose at the same time. We can either
grow wheat or sugar-cane in it. The choice is before us. If we utilize it for
growing wheat, then we will have to make payment at least equal to the amount
which it would have brought when sugar-cane was to be grown in it.
If the sum
equal to the amount of transfer earning is not paid to the owner of sugar cane
plot, then this land will not be available for growing wheat.
The minimum price or payment that must be paid to the owner of plot for
inducing him to make the land available for a growing of wheat is called
transfer payment or transfer earning or transferring cost.
Since transfer
payments are part of the supply price from the point of view of an industry,
therefore these enter into the cost of. production and determine the price of
the product.
