Old view (Controversy, Ricardo’s Point of view):
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. Rent 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.
For example, 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 vise- versa.
In the words of Ricardo:
“Corn is high, not because rent is paid, but rent is paid because corn is high”.
Or, on 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.
Transfer Payment or Transfer Earning or Transferring Cost:
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 sugarcane 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 sugarcane 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.