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Chapter: 11th 12th std standard Indian Economy Economic status Higher secondary school College

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Modern Theory of Rent and Quasi-Rent

In the modern theory of rent, the term rent refers to 'payments made for factors of production which are in imperfectly elastic supply'.

Modern Theory of Rent

 

In the modern theory of rent, the term rent refers to 'payments made for factors of production which are in imperfectly elastic supply'. By this definition, rent is applied to other factors like labour and capital. In other words, rent does not apply to land alone. Just as land differs in fertility, men differ in their ability. For example, a surgeon with a rare skill may earn a lot of income. There is an element of rent in it. In fact, we have a theory of profits known as 'Rent theory of profits'.

 

Marshall has introduced the concept of 'Quasi-rent' with regard to machines and other man-made appliances. So the modern view is that rent can be applied to all factors of production. Whenever, the supply of a factor is inelastic in relation to the demand for it, rent arises.

 

To explain rent, modern economists also make use of the term transfer earnings. Transfer earnings refer to the amount that a factor could earn in its best paid alternative employment. It represents the opportunity cost of its present employment. Any payment in excess of this amount is a surplus above what is necessary to retain the factor in its best-paid employment and so is rent. Thus, any payment in excess of transfer earnings is economic rent. If a popular south Indian Cinema actor who is normally paid, say Rs.two crores, gets an offer to act in a Hindi film for Rs. three crores, his transfer earnings are Rs. two crores. Rs. one crore may be considered as economic rent for acting in the Hindi film. So the main point about the modern theory of rent is that rent is not peculiar to land alone. The rent aspect can be seen in other factor incomes as well.

 

Quasi-Rent

 

According to Marshall, 'Quasi-rent is the income derived from machines and other appliances for production by man'.

 

There are some machines and other man-made appliances (e.g. boats) whose supply may be inelastic in the short run in relation to the demand for them. For example, when there is large increase in demand for fish during a season, the demand for boats will increase. But you cannot increase their supply over night. So they will earn some extra income over and above the normal income they receive. This, Marshall calls Quasi-rent. Quasi-rent will disappear, when once the supply of boats increases.
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