Rent Vs. Prices (Relation Between Rent and Prices)
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Rent Vs. Prices (Relation Between Rent and Prices)

Rent vs. Prices (Relation between rent and prices) Ricardian view It would seem that the rent, which a tenant is paying to the landlord, must enter into the calculations of the farmer when he disposes of his produce. But if the Ricardian theory of rent is properly grasped, it will be clear that rent canÂ’t go through into price. It doesnÂ’t form a component of cost of production.

Rent vs. Prices (Relation between rent and prices)

Ricardian view

It would seem that the rent, which a tenant is paying to the landlord, must enter into the calculations of the farmer when he disposes of his produce. But if the Ricardian theory of rent is properly grasped, it will be clear that rent can’t go through into price. It doesn’t form a component of cost of production.

Suppose there are three types of land under cultivation. A, B and C arranged in order of fertility. Suppose further that the cost of production per quintal of wheat respectively in these lands is Rs. 50, Rs. 100, and Rs. 150. Now it is quite clear that so long as the produce raised on C class land is considered necessary to meet the requirements of the society, the price in the market must be high enough to compensate these cultivators. In other words, the price cannot be less than Hs. 150 per quintal. If it were less, the C class cultivators will give up cultivation, supply will fall short of demand, and its price will rise to Rs. 150 to make it worthwhile for the cultivators of C class land to carry on cultivation. C class land is on the margin of cultivation. Marginal land does not leave any surplus to the cultivators over and above their cost of production, including, of course, the normal profit. Therefore, the marginal cultivators do not pay rent. Rent arises only in the cultivation of superior lands, A, B in this case, We see, therefore, that it is the cost of production at the margin which has got a determining influence on price. But there is no rent at the margin. Hence, rent is not an element of those costs which determine price. In other words, rent does not enter into price.

But it is not to be implicit that rent has no role to do with price. When price increases, margin of crop growing will fall; and substandard lands, which it was not valuable to farm prior to, will now develop into valuable assets. The land, which was unimportant or no-rent land earlier, starts producing a surplus, and therefore rent. As a result, we see that as soon as price increases, rent also increases. This is right yet from the commonsensical point of outlook.

When, on the other hand, prices fall, some lands go out of cultivation, and margin of cultivation ascends. The land which was paying rent before will cease paying rent now. Hence, rents will fall.

Price is the source whereas rent is the result.

 

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