Discuss briefly the modern theory of rent.
Or, What do you mean by economic rent?
According to modern economists, any factor of production can earn rent. According to them, earnings of any factor of production over transfer earning or minimum supply price is called economic rent of that factor of production. Transfer earning or minimum supply price of any factor of production is that amount of income or that amount of price below which the factors of production cannot be supplied i.e. transfer earning or supply price of any factor of production is the minimum amount of money which is given as remuneration to keep that factor of production in the production process. In other words, the minimum amount of money that is given as remuneration to the factor of production so that the factor of production does not move to the next best alternative work is the transfer earning or minimum supply price of that factor of production.
It is now explained with the help of a hypothetical example.
Suppose a land can be used to cultivate rice or wheat i.e. the land can be used for different purposes. Suppose earnings from the land is Rs. 2,000 when the land is used to cultivate rice and the earnings from the land is Rs. 2,500 when the land is used to cultivate wheat. Here, Rs. 2,000 is the transfer earnings of the land. This means that minimum Rs. 2,000 must be given to the land if the land is used to cultivate wheat otherwise the land will be used to cultivate rice. In this example Rs. 2,500 is the actual income of land for wheat cultivation but Rs. 2,000 is the transfer earnings. Therefore, here economic rent is (Rs. 2,500 – Rs. 2,000) Rs. 500. Thus, it can be said that Economic rent = Actual income – Transfer earnings (or minimum supply price).
Thus economic rent is created when the actual income of any factor of production is greater than the minimum supply price of that factor of production. This economic rent may be created not only for land but also for other factors of production.
In modern theory, economic rent is determined by the demand and supply of the factor of production.
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