The theory was presented by David Ricardo. He presented his theory in his book “Principles of Political Economy and Taxation” in 1817.
As per his definition “Rent is paid to the landlord for the original and indestructible powers of the soil”
So, according to him, the rent arises because of its scarcity and also of its varying fertility. Hence, according to the Ricardian theory of rent, the different pieces of land have different productivity. Some land is more fertile and some are less fertile. That’s why their output also differs. That is when same units of variable factors are applied to different categories of land, the more fertile land will produce more output. Likewise, the less fertile land will produce less output. Hence, the difference between the output of superior land and marginal land is called rent. Marginal land is the one which yields output exactly equal to the cost of production. Therefore, it produces no rent.
Ricardian Theory of Rent Explanation:
Suppose there are four grades of land I.e. A, B, C and D. the grade A land is more fertile than B and B grade land is more fertile than C and so on.People migrate to this island where we have four types of land. The Ricardian theory also assumes that people know about the fertility of the land. As per theory, one will use the land in order of its superiority.
So, people will use grade A land first for cultivation. Land A is no rent land and is the marginal land first. The production from this land is 45 quintals. As it is marginal land, so the total revenue from 45 quintals of rice is exactly equal to the cost incurred for the production of that much rice.
Now due to population growth or more people migrating there, Grade A land falls short of requirements. So, people will bring B grade land under cultivation. We know that grade B is inferior to Grade A land. Grade B Land will have the production of 40 quintals only. Now, just because it has an output equal to its cost of production. It will be the marginal rent and hence, Grade A rent yields rent and the rent of grade A land will be (45-40=15).Their fertility differs and that’s why the difference between outputs of both the land will be determined as the rent for the first one.
Similarly, Grade B land also falls short of the requirements. Now, People will settle in Grade C land and use it for cultivation. Suppose the production here is 35 quintals and it covers only the cost of production.so, C Grade land will become marginal land and Grade B yields rent i.e. (40-30=10). When grade C also falls short of the requirements, people will use Grade D land for cultivation and then Grade C land will yield rent i.e. (35-30=5)
When Grade C land is full, people will settle on Grade D land. The grade D land covers only the cost of production and thus it is now the marginal land. The rent is due to the superiority and of one over the other. it is also because of the scarcity of land.
Ricardian Theory of Rent Diagram:
The shaded area is the cost of production which is same for all four grades of land. Because the input variables are same for all and hence you can see the rent for each Grade of land.
Ricardian Theory of Rent Assumptions:
The Ricardian theory of rent in economics has certain assumptions which are as follow;
There is no alternate use of the rent
For the Ricardian theory of rent, one of the assumptions is that use of land for farming only. according to it, the land has no other alternate uses. So, the only use of the land is for cultivation.
Fertility of rent is different:
For the Ricardian theory of rent to be applicable, it is assumed that fertility of rent varies from land to land. Each piece of land has different fertility. That’s why rent is paid because of its different fertility.
Law of Diminishing Returns
The production in agriculture takes place under the law of diminishing returns. So, the output will not increase at the same rate at which labor or capital increases.
No Rent Land:
The theory assumes the presence of no rent land which means that the land doesn’t have any rent. The no-rent land is the marginal land.The rent has its output equal to its cost of production. In this case, there is no surplus output and hence no rent.
Original and Indestructible Powers of Soil:
Rent arises due to original and indestructible powers of the soil.one cannot destroy the fertility of land.hence, the land with higher superiority will give rise to high rent
The Ricardian theory of rent assumes the presence of perfect competition in the market. That’s why the price is equal to AR=MR=AC=MC at the marginal land. Whereas, economic rent is that which accrues above the cost of production.
Descending order of Cultivation
The Ricardian theory of Rent assumes that one will use the more fertile and favorable land first. It means that cultivation starts with Superiority land. I.e. so, we will use Grade A land first and so on.
Criticisms of Ricardian Theory of Rent:
The Ricardian theory of rent has certain criticisms which are as follows
Indestructible Powers of Soil:
Ricardo assumes the power of the soil to be indestructible. However, it is not always the case. one cannot guaranty that rent A grade land will always remain A Grade.The fertility of land decrease with continuous cultivation. Moreover, in case of atomic explosions, the land loses its fertility.
The Sequence of Cultivation:
The sequence of cultivation is not true in real life. It is not always the case that one will use more fertile land first. Because Canada and America used inferior land first and more fertile lands were forests.
Land’s Equal Fertility:
The Ricardian theory of rent explains that rent is paid due to the superiority of one land over the other. This is not true. Because even if the lands have equal fertility they will still have the rent. In this case, the land will arise because of the limited supply of the land. If the supply doesn’t meet the demand of consumers. The price of the products will go up and hence the revenue will exceed the cost of the production.
The No Rent Objection
It is an imaginary assumption because in real life we don’t have the concept of no rent land. We cannot find any no rent land.
Rent is the Part of Price:
According to Ricardo rent doesn’t count in the price, while in real rent forms a part of price and cost.