Often, the landowner for a fee leases the land to the tenant, who uses this land for agricultural production. With the proceeds from the sale of the fruits of his labor, he pays the land owner for the lease. It is this board that is called rent.
Types of land rent
Land plots differ from each other in that some are in favorable climatic zones, while others are in unfavorable ones. There is also a difference in location: there are sites that lie in remote ecologically clean areas, or, conversely, near large cities, highways, factories, 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 monopolized natural power and the market price.
Differential rent appears in two versions:
- In the first case, it is an additional net income generated from conducting business on the best plots of land in terms of fertility and location. These indicators provide the necessary conditions to reduce the individual cost of production. For example, to get a good crop requires less fertilizer, and a small distance from the market reduces transportation costs. All these indicators significantly reduce costs. Thus, the amount of additional profit increases and forms the material basis of the rent. Such a rent of land is fully appropriated by the landowner, since it is already established by him taking into account the quality of the plot.
- In the second case, it is presented in the form of net income, which is formed as a result of intensive farming. Under the condition of constant economic investments to increase fertility and their size, such a rent is obtained. It is fully assigned by the tenant, since the amount of rent depends on his efforts.
Differential rent in the second case is an incentive for agriculture. It differs from the first in that it is assigned by the tenant himself before the contract expires. But after it, this differential land rent becomes the property of the land owner. This is one of the negative consequences of the introduction of a market economy in agriculture.
Differential rent can be formed not only in agriculture, but also in the mining industry. Moreover, the conditions of its formation and the magnitude are the same as in agriculture. Where natural wealth is assigned to owners or enterprises, and there is a difference in labor productivity (a rich mine, a conveniently located plot of land or forest), that same differential rent is formed.
Consider another type. The absolute rent of the earth is the mechanism of the economy, which entails a prudent attitude towards the land. This type of rent is formed due to inelastic supply of land, if it is privately owned. As you know, land suitable for full agricultural use is not enough to provide everyone. But landowners are asking for high rents for any plot, no matter what land fertility and location. And tenants, in order to be able to pay rent, are forced to raise prices for agricultural products.
This type of land rent is appropriated by the owner of his plot as a rent for an absolutely limited resource.