Absolute and differential rent of land

Often, the landowner for a fee rents the land to the tenant, who uses the land to produce agricultural products. With the proceeds from the sale of the fruits of his labor, he pays for the lease with the owner of the land. It is this fee that is called rent.

Types of land rent

Land plots differ from one another in that some are in favorable natural and climatic zones, while others are in unfavorable zones . There is also a difference in location: there are sites that lie in remote ecologically clean areas, or, conversely, near major cities, highways, plants and so on.

Land rent is divided into two types: differential and absolute.

Differential rent

This type is formed by calculating the difference between the individual price of agricultural products produced in areas that have a monopolized natural power and the market price.

Differential rent appears in two versions:

• In the first case, it is an additional net income derived from conducting activities at the best fertile and location-wise land plots. These indicators provide the necessary conditions for reducing the individual cost of products. For example, to obtain a good harvest requires less fertilizer, and a small distance from the market reduces transportation costs. All these indicators significantly reduce costs. Thus, the size of the additional profit increases and forms the material ground of the rent. Such a rent of land is fully appropriated by the landowner, since it is established by him already with regard to the quality of the plot.

• In the second case, it is represented in the form of net income, which is formed as a result of intensive farming. Given the constant economic investment to improve fertility and their value, such a rent is obtained. It is fully appropriated by the tenant, since the value of the rent depends on its efforts.

Differential rent in the second case is an incentive to farming. It differs from the first in that it is assigned by the tenant himself before the contract expires. But after its expiration, this differential land rent becomes the property of the owner of the land. This is one of the negative consequences of the introduction of a market economy in the agricultural economy.

Differential rent can be formed not only exclusively in agriculture, but also in the extractive industry. The conditions of its formation and magnitude are the same as in agriculture. Wherever natural wealth is assigned to owners or enterprises, and there is a difference in labor productivity (a rich mine, a conveniently located piece of land or forest), that same differential rent is formed.

Let's consider one more type. Absolute rent of the land is a mechanism of the economy, which entails a zealous attitude to the land. This type of rent is formed due to inelastic supply of land, if it is privately owned. As you know, the land, suitable for full-fledged agricultural use, is not enough to provide everyone. But landowners request a high rent for any site, regardless of what the fertility of land and location. And tenants in order to be able to pay rent, are forced to overstate the prices of agricultural products.

This type of land rent is appropriated by the owner of his plot as a payment for renting an absolutely limited resource.