Wednesday, February 27, 2013

Differential Rents and Differential Prices

Land is not homogeneous, as we have assumed so far. It differs in quality. One of the chief qualitative differences of land rendering comparable services in other respects is the result of differences in distance from production and consumption centers.
Suppose the last additional unit of what we could call standard land, cultivated by 1,000 workers, increases the productivity of those thousand workers by the product of five workers. There may exist other land of which the last unit, added to an equal area, increases the productivity of the same number of workers by the product of three, two or one worker. There may even exist land of such poor quality that additional amounts do not increase the product at all—marginal land.
Except for this last-mentioned case, entrepreneurs will be prepared to pay money for all land, but obviously less than for standard land. Their bids for various sorts of land will vary according to the work-replacing capacity of the land. Land of which additional quantities add nothing to the productivity of a given number of workers is worthless and generally free, i.e. it is nobody's property.
The classical economists explained all the advantages accruing to the owner of land—they called them rent or ground rent—by the fact that good land yields more than bad land. In a certain sense all ground rent is indeed differential rent. But in this sense all wages, too, are differential rents. They are the difference between what is paid to a worker of high and to a worker of low or zero productivity. But the differential rent theory does not explain the laws according to which land of a given quality cultivated by a given number of workers is to be valued. Nor does this theory explain the point at which land becomes marginal.
The expression rent, and more particularly ground rent, for all the benefits land yields to its owners is none the less still in current use.
Obviously land of very different quality is used simultaneously, but as land of lower quality yields less vast acreages of it are equivalent to small areas of good land.
Differential rents and differential prices caused by quality differences should not be confused with the rents and prices of homogeneous land of a certain quality worked by a given number of workers.

Homogeneous land of a certain quality yields its owner a revenue which corresponds to the additional productivity of the last unit of such land taken into use. The benefit of the higher productivity of preceding units accrues to the workers in the form of wages.
Land of inferior quality yields less revenue according to its lower productivity. Compared with the rent of such inferior land the rent of the better land is indeed a differential rent.
Rent from good land can never be higher than rent from inferior land offered at correspondingly lower prices. Scarcity of land is a relative concept. With correspondingly higher demand inferior or more distant land is taken into use. The “frontier” moves further out.

Common Sense Economics

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