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Rent

Rent

In common usage

In classical economics

In modern economics

Determination of rent

BIBLIOGRAPHY

There are at least three distinct classes of meanings for rent: the common usage, the usage in classical economics, and the usage in modern economics. These are discussed in turn in this section. More restrictive meanings or special kinds of rent will be discussed under the appropriate general classification. In succeeding sections the determination of rent in its various senses will be discussed.

In common usage

As used in everyday speech, rent means a payment for the services of a material asset for a specific period of time. As such, rent is comparable to the wages of labor, and, as suggested by Frank Knight, both wages and rent might be classed under the heading hire value. The term rental value might also be used for what is commonly called rent to avoid confusion with the technical economic meaning of rent. Real estate, or land and buildings, is the type of asset most frequently rented, but a wide variety of other consumer and producer durable goods are rented as well.

Renting or leasing as an alternative to ownership may take place for a variety of reasons, one of which is infrequency or short duration of use relative to costs of purchase and sale. Houses or apartments are typically rented by smaller households, probably because small dwellings are relatively more costly than larger ones when provided in the form of single-family dwellings, and by younger families, who have little accumulated nonhuman wealth (i.e., wealth other than their ability to earn income with their own labor) and for whom the interest cost of capital invested in ownership is high. Business firms may choose leasing in preference to ownership for quite similar reasons. In addition, renting of any asset may be preferred by households or business firms that have a greater than average aversion to the risk of the change in value of assets that ownership entails.

The actual rental payment made by the user of an asset includes several components. First, gross rent, or rental value, includes a payment to cover depreciation, which is the decline in the value of the asset during its period of use. Second, where the owner rather than the user of the asset is liable for payment of property taxes, as is typically the case in the United States, the rental payment will include an allowance to cover these taxes. The rental payment, like an interest payment, may also include a component to cover the cost of making and servicing the lease agreement. And finally, the rent of any asset includes a payment to cover interest costs on the value of the asset during its period of use.

There are a variety of special types of rental payments. The term “ground rent” refers to a payment for the use of land on a long-term lease, frequently 99 years. Such payments provide a relatively sure and very stable income stream, which some investors find attractive. “Space rent” in the consumer expenditure tables of the U.S. national income accounts refers to the rental value of a structure and the land on which it is situated, apart from any payment for utilities and furnishings supplied by the landlord. In the U.S. Census Bureau reports on housing, “contract rent” means the payment agreed on by tenant and landlord and includes any payment for utilities and furnishings supplied, while “gross rent” refers to contract rent plus the estimated value of all utilities not furnished the tenant by the landlord. Finally, the “rental income of persons” as a component of the U.S. national income accounts refers mainly to the income actually received directly by households from rented nonfarm property and the imputed net return from owner-occupied nonfarm housing. It also includes the net returns received by persons from farm real estate, but this component is small relative to the other two. It should be noted that the rental income of persons shown in the U.S. national income accounts includes only a small fraction of the rental value of land or of material assets generally. Most rental income is actually paid out in the form of corporate income or income to unincorporated businesses.

In classical economics

Economists realized quite early that much of what is commonly called rent is really nothing but the return to the various forms of capital investment. Thus, the classical economists reserved the term “rent” for a type of payment they believed to be qualitatively distinct from wages and interest. This was that part of the landlord’s return for the use of “the original and indestructible powers of the soil,” as Ricardo put it. Rent of land in this sense might arise because of the limitation on its quantity, as stressed by Malthus, and this type of rent was sometimes called “scarcity rent.” Land rent might also result from differences in fertility and location. Rent arising from this source was frequently called “differential rent.” It is easy to make too much of the distinction between scarcity and differential rent, however, since the most fertile or favorably located land would earn a differential return over other land only if the former were scarce. [See the biographies ofMalthus; Ricardo.]

Ricardo especially stressed that the most fertile and favorably situated land would be cultivated first. With the increase in population and wealth, according to Ricardo, land of inferior quality is taken into cultivation. The exchange value of raw produce would rise because more labor (and capital used with labor in fixed proportions, presumably) would be required to produce on the less fertile land. The first land would then yield a return equal to the difference between the produce obtained by the employment of equal quantities of capital and labor on each quality of land. Rent, Ricardo argued, does not enter into the cost of production. The latter is determined by the quantities of other factors employed at the margin of cultivation on land that yields no rent. “Corn [i.e., food] is not high because rent is paid, but a rent is paid because corn is high,” in Ricardo’s words.

Even in the more limited sense in which the term was used by the classical economists, it is difficult to ascribe the returns to land to some “original and indestructible” properties of nature. In a very real sense, land as a productive factor was created as capital by pioneers who gave up other income in traveling to and preparing the land for cultivation. To these pioneers, the return to their land after an allowance for the obvious costs of buildings and other visible improvements was merely a return to their earlier sacrifices. To later owners of the land, its return was merely a return to their fluid capital, which might alternatively have been used to acquire other material assets. Land today is reclaimed through irrigation and drainage, and its fertility is obviously capable of exhaustion. In addition, the supply of favorably located land is continually being increased by improvements in transportation. Finally, when land has more than one use, the maximum income it can earn in alternative uses is a part of the cost of production for the commodity it helps to produce. Thus, oranges may be expensive because of high returns to land used to grow oranges if the high returns to land upon which oranges are grown result from its high value for alternative residential and other urban uses. [SeeCost.]

Not only is land reproducible and destructible in much the same way as other material assets but other assets may possess properties similar to those the classical economists ascribed to land. Any productive factor, including labor, is limited in absolute amount and thus earns a return that results from its scarcity. Quality differentials exist for most classes of productive factors no matter how narrowly defined; differential incomes are earned by members of a particular class of productive factor as a result of their differing productivities. And many productive factors earn incomes that exceed the minimum amount necessary to insure their employment in the specific use to which they are put.

In modern economics

For reasons such as these, economists today rarely think of rent as a qualitatively distinct type of payment accruing to a specific type of productive factor. Rather, “rent,” along with the terms “cost” and “profit,” refers to types of payment that may be included in the income of the owner of any kind of productive factor. These types of payment are distinguished in terms of (1) the minimum payment necessary to induce a factor into a specific use, (2) the payment a factor owner expects to receive when the factor enters or remains in a specific use, and (3) the actual payment received. Rent is the excess of a factor’s expected return or income over the minimum necessary to bring forth the particular service to its specific use. Cost is the minimum necessary payment, while profit is the excess of the actual payment received over the expected payment when the resource was committed to the specific use. The term “entrepreneurial rent” is frequently used to describe the expected return to a firm over and above the minimum necessary to induce the firm to enter or remain in a specific industry. It corresponds to what is sometimes loosely thought of as profit.

That part of a factor payment termed rent by the present-day economist is, like the classical economist’s rent, price-determined rather than price-determining. It is important to realize, however, that the distinction between cost and rent is a flexible one and depends critically upon the range of alternatives considered and upon the time period allowed for adjustment to changed conditions. For the economy as a whole, the return to many human and material productive services is wholly rent, since no other uses are available for and hence no opportunities are forgone by some employment. To any specific user of a particular productive service, in contrast, the payment he makes is wholly a cost if the productive service could earn as much from another firm in the same industry. In general, the broader the range of alternatives open to a productive service, the larger is the portion of its income that is a cost and the smaller its rent.

The distinction between cost and rent also depends upon the time period for adjustment one considers. For very short time periods most human and material assets are in effect fixed in their current uses. Thus, any return to their owners over and above the minimum return necessary to insure that they be employed at all is rent. The longer the period of adjustment one considers, the greater the number of alternative employments that become available and the smaller the rents. In the longest of all long runs many factors of production have a great number of alternative employments, and in consequence their incomes are mostly cost. The term “quasi rent,” introduced by Alfred Marshall, is used for a payment, especially to the specific material embodiment of nonhuman capital, which is rent in the short run but a cost in the long run, that is, when the capital is no longer fixed in a specific material form.

Finally, it should be stressed again that in the modern sense of the term, rent may be a part of the income of any productive factor. It has already been pointed out that the incomes accruing to material assets are largely rent so long as the specific material form of capital is fixed. In addition, actual wage and salary payments consist in part of rents in differing degree, depending upon circumstances already noted. The salaries of college professors, for example, may be largely a cost to any particular institution that employs them. From the viewpoint of all institutions of higher learning, however, the excess of the incomes of professors when adjusted for nonmonetary advantages over the incomes they might earn in government or industry is rent. Considering all potential employers of college professors, most of a professor’s income is rent once he has made his occupational commitment. The same expected income may be largely a cost, however, before an individual chooses to enter college teaching in preference to some other occupation.

Determination of rent

In this section the principles of the determination of rent are discussed. Rent as rental, or hire, value is considered first; this is followed by a discussion of the determinants of rent as an excess of expected return over cost. Because rent is so often thought of as the return to land, special attention will be given to the level of land rentals generally. This section will conclude with a discussion of the share of returns to land in the national income. The discussion of the returns to land is continued in the third section, where differences in land rentals attributable to differences in location are discussed.

As rental value

The determination of the rental, or hire, value of an asset is but a specific instance of the determination of the prices of productive services generally. In any specific use or industry the rental value of a particular material asset is equal to the price of the final product multiplied by the marginal physical product of the services of the asset in the specific use, provided that competition prevails in both the product and the factor markets. The marginal physical productivity of the asset’s services, in turn, varies directly with its scarcity relative to other productive factors. It is analytically useful, as in any problem of price determination, to separate the forces affecting rental value into (1) demand for the services of an asset in a particular industry as derived from the demand for the final product produced by the industry, (2) the supply of other productive factors to the industry, and (3) conditions of technology. For the economy as a whole, the demand for an asset’s services is simply the summation of all the individual industry demand curves, provided that conditions of supply and technology for the economy as a whole are used in deriving the industry factor demand curves to be summed.

An increase in the demand for final product tends to raise both the rental per unit of an asset and the aggregate of rental payments to the asset in question. In general, an increase in the supply of other productive factors will tend to reduce the demand for the factor in question as these other factors are substituted for it in production. (It is possible, of course, for an increase in the supply of complementary factors to increase the demand for the asset in question, but on balance all other factors taken together are substitutes.) On the other hand, the increase in supply of other factors leads to an expansion of the industry’s output and, hence, an increase in the demand for the asset in question. The strength of the increase in demand operating through the expansion of output is greater, the greater the elasticity of demand for the industry’s product. The substitution effect varies directly with what is technically known as the elasticity of substitution in production between the asset in question and all other factors, that is, the relative change in the ratio of the input of the asset in question to all other factor inputs, divided by the relative change in the inverse ratio of their marginal physical productivities when output is held constant. Its value varies from zero, in the case where the asset in question is used in fixed proportions with all other factors, to plus infinity, where the asset in question and all other factors are perfect substitutes. The net effect of an increase in the supply of all other factors will be to increase or decrease demand for, and hence rental value of, the asset in question, depending upon whether the elasticity of industry demand is numerically larger or smaller than the elasticity of substitution in production.

A technological change that increases or reduces the marginal productivity of the asset in question but leaves output unchanged will increase or reduce its demand and rental value. A neutral technological change, or one that increases the marginal productivity of the asset in question and all others in equal relative amounts, will increase or reduce the demand for, and rental value of, an asset, depending upon whether the elasticity of demand for the industry’s product is numerically greater than or less than one.

In applying the above propositions to land rents it is important to distinguish between agricultural and urban uses of land. It would appear that the demand for agricultural output is highly inelastic with respect to its relative price and that the elasticity of substitution is about unity. On the other hand, the price elasticity of demand for housing, by far the most important use of urban land, is probably unity or even larger numerically, and the demand elasticities for many other urban products may well exceed unity. Since aggregate land values would appear to be large relative to the total value of structures near the centers of cities, where rentals per unit of land are high, the elasticity of substitution of land for other factors in producing most urban products is probably less than unity. Thus, it would appear that an increase in the supply of nonland factors would reduce the demand for, and rental value of, agricultural land and increase them for urban land. Also, a neutral technological improvement would reduce the rental value of agricultural land but leave unchanged or increase urban land rentals.

The supply schedule of a particular productive service to a specific use or industry is merely the aggregate supply schedule of the factor less the demand schedule for the factor in all other uses. At the edge of cities, for example, the total quantity of all land is fixed, and the supply of land for residential and other urban uses is this fixed quantity less the demand for agricultural land. The demand for the output of agricultural firms in the vicinity of cities is highly elastic, since this output is but a small part of the total national or world output. One would therefore expect the agricultural demand for, and the urban supply of, land at the edges of cities to be highly elastic.

Little can be said generally about the aggregate supply schedule of a productive factor facing the economy as a whole. However, the shape of the aggregate supply schedule depends critically upon the length of time allowed for adjustment, certainly so for nonhuman agents of production. Probably because it is quite costly to add rapidly to the stocks of most material assets, their supplies tend to be highly inelastic over short periods of time. In the long run, the relative supply of most material assets—for example, houses as opposed to office buildings—may well be highly elastic. Since it would appear that the rate of saving is relatively insensitive to the rate of interest, the aggregate supply of all material assets or of capital to the economy is likewise probably relatively insensitive to their rental value.

An increase in the supply of an asset will lower its rental value per unit, but the aggregate rental value of all assets of a given type will increase or decrease depending upon whether the price elasticity of the factor demand schedule is numerically larger or smaller than unity. Provided that the supply of other factors to a specific industry is highly elastic, the demand elasticity for the services of a particular asset is a weighted average of the (negative of the) elasticity of substitution in production and the demand elasticity for the product; the weights are respectively the fraction of the industry’s receipts paid out to all other factors and to owners of the asset in question. Thus, the demand for the services of land is likely to be inelastic— in agriculture because of the inelastic demand for the final product and in housing and other urban uses because of the less than unit elasticity of substitution in production. In either case, an increase in the supply of land, as might be brought about, in effect, by an improvement in transportation, would reduce the aggregate rental value of land.

As excess of expected return over cost

All of the forces that affect rent in the sense of rental, or hire, value also affect rent as the excess of expected return over cost. For any particular unit of the productive service actually devoted to the specific use, rent is merely the difference between the expected market price and the ordinate of the factor supply schedule at that quantity at which the particular unit enters into the specific use. In Figure 1, for example, units of the productive service that would enter the specific use at a price per unit of OD’ receive a rent equal to D’E when the market price is OE, as under the conditions illustrated. The aggregate rent paid out to all units of the factor employed in the specific use is the integral of expected price minus the ordinate of the supply schedule taken over all units of the service employed in

the specific use, the triangle CEF in Figure 1. Clearly, any event that causes the demand for the factor to increase, increases the rent received by each unit of the productive service and the aggregate rent received by all taken together. An increase in the supply schedule reduces the rent received by any given unit of the productive service. However, an increase in supply may either increase or decrease aggregate rent paid. If, for example, the supply schedule is perfectly inelastic, the whole of the expected payment to the factor is rent, and this total payment increases or decreases as demand is elastic or inelastic.

Rent as an excess of expected return over cost depends critically upon the slope of the supply schedule. Given the point of intersection of the demand and supply schedule, the steeper the supply schedule, the greater the rent received by any unit of the service and the aggregate rent received by all. In the case of labor, or the services of human beings, the slope of the supply schedule for a particular occupation varies directly with the extent of differences among individuals in their abilities to perform specific functions and, perhaps more importantly, with differences in their evaluations of the nonmonetary disadvantages or attractiveness of the occupation relative to others. Non-monetary considerations are generally of little importance for most nonhuman assets.

Share in national income

The final topic considered in this section is the share of aggregate land rentals in the national income. This share, or the share of any factor, depends critically upon the elasticity of substitution between it and all other factors in production. An increase in the supply of other factors relative to land increases the aggregate of all land rentals relative to the national income, depending upon whether the elasticity of substitution is less than or greater than unity. A neutral technological change likewise increases land’s share if the elasticity of substitution is less than unity, provided that, as is probably the case, the elasticity of supply of land to the economy as a whole is less than that of all other factors. Of course, a technological change that increases land’s marginal productivity and reduces that of other factors, leaving output unchanged, will increase land’s share.

It has been asserted earlier that in agricultural uses the elasticity of substitution of land for other factors is about unity, while for urban uses of land this elasticity would appear to be less than unity. For the economy as a whole, the elasticity of substitution also depends upon the substitutability of agricultural for urban products in consumption. The very low relative price elasticity of demand for farm products suggests that substitution possibilities in consumption are small. This last consideration, coupled with the fact that urban output is large relative to farm output, suggests that for the economy as a whole the elasticity of substitution of land for other factors is probably less than unity. While data are very scanty, it is probably true that the returns to land are a smaller fraction of the national income in the more highly developed economies, including the United States, and have grown less rapidly over time than has national income. Such tendencies might result from the relative increase in land supply brought about by improvements in transportation with economic development or by the fact that the demand for land-intensive commodities, such as farm products, grows relatively less rapidly than the national income.

Location rents

This section continues the examination of the rental value of land by considering differential rentals attributable to differences in location. Such differentials are frequently referred to as “location rents” and are the major source of differences in the rental value of different parcels of urban land. While of interest for their own sake, differential land rentals are especially important because of their relation to the spatial organization of economic activity.

The first economist to undertake an investigation of the spatial aspects of economic activity in any detail was von Thiinen. He postulated a single city located in a boundless plain of land of homogeneous quality in which transportation costs varied with distance from the city but were otherwise invariant. (This is what has since come to be known as a “transportation surface”) He then showed that different types of farming would be arranged in annular (that is, ringlike) zones around the city. Commodities for which transport costs were relatively high—milk, for example, because of its perishability—or for which land is relatively unimportant would tend to be produced in the inner annuli, and commodities for which transport costs were low and land important would tend to be produced in the outer ones. Land rentals declined from annulus to annulus, and within a given annular zone the difference in land rental was equal to the difference in costs of production plus transportation to the market in the city.

In most developed countries today agricultural produce tends to be traded in national or world markets. Transportation costs to a particular market, except for a few commodities such as dairy products, have relatively little effect on the location of agricultural production. Thunen’s analysis, however, is highly relevant for the analysis of land use in cities or urbanized areas and, in fact, is the basis for most modern economic theories of city structure. It also bears a striking similarity to the concentric-zone theory of city structure, developed by the sociologist Ernest W. Burgess about a century later. In theories of city structure, the central business district (CBD) plays the role of Thunen’s isolated city. Located near the hub of the city’s internal transport system, the CBD is generally the area of maximum accessibility to the local market for commodities and services of many kinds and to the local labor market. In addition, since rail terminals are typically located adjacent to the CBD, it is close to outside markets and sources of supply. (With the advent of highway and air transport, however, the comparative advantage of the CBD on this score has declined.) Since the CBD is generally the largest single employment and shopping center in the city, accessibility to the CBD is especially important for residential users of land. [See the biographies ofBurgess; ThÜnen.]

In the analysis of the relation of land rentals to the location of economic activity in cities, four distinct kinds of considerations are relevant. First, provided that competition prevails, any given user of land takes the prevailing level of rentals in any location as given. The use of land relative to other productive factors is governed by the principle that to minimize the cost of producing any given output, the firm adjusts its inputs in such a way that the marginal physical product per dollar spent is the same for all inputs. Thus, where land rentals are high relative to the prices of other productive services the marginal physical product of land is relatively high. This means, for example, that high-rise apartment buildings tend to be built where residential land rentals are highest, as do loft-type or multistoried factory buildings in commercial areas of relatively high land rentals. Conversely, single-family detached houses and single-story factory buildings tend to predominate in areas of relatively low land values.

Secondly, for firms of any given industry to be in locational equilibrium, it is necessary for land rentals to vary directly with the price received for their product and inversely with the price paid for productive factors other than land, both being measured at the point of production. If, for example, firms located closer to the CBD received higher prices for their products but all firms paid the same rentals per unit of land, firms closer to the CBD would earn larger incomes. It would then be in the interest of firms located further from the CBD to offer more for the closer sites than firms located there were currently paying. In the process, the rental of sites closer to the CBD would be bid up, while that of more distant sites would be bid down. In general, the conditions of firm equilibrium require that the relative variation in the rentals of land used by firms in a given industry be greater, the more product or nonland input prices vary relatively with respect to location and the smaller the share of land in the receipts of the industry. The variation of final product and input prices with location results primarily from transport costs. Transport costs on final products or raw materials, in turn, tend to be greatest for small shipments and shippers, for bulky and difficult-to-handle goods, and for goods of high value in proportion to weight. The costs of transporting people, both as buyers of final products and sellers of labor, are also important determinants of rental gradients.

The third consideration relevant in the determination of differential land rentals might be called equilibrium in the market for land. Equilibrium requires that each parcel of land be devoted to that use which yields the highest rental. For if this were not the case, landowners could increase their incomes by leasing their land to firms in alternate industries. Both the amount of rental offered for land at any location and the rate of change of rental with change in location, or rental gradient, are important in allocating land among industries. If in the vicinity of any center of activity, or local peak in land rentals, firms of two different industries are to locate, firms of the industry with the steeper rental gradient will locate closer to the center. This follows from the fact that if the function showing the rental one industry offers for land is anywhere above that for the other industry, it will be so at the center. Therefore, as one proceeds out from any local peak in land values, the relative decline in land rentals will diminish in passing from the area of location of one industry to another.

It should be noted that taken together, and in the absence of external economies in land use, the conditions of locational and land-market equilibrium imply that the rental value of land is maximized. Maximization of rental value is requisite to efficient resource use. In actual practice, of course, external economies in urban land use may be of great substantive importance, and in the absence of conscious social control the bidding for land by private individuals and business firms may fail to maximize the rental value of land. This failure provides the economic rationale for planning, zoning, and other forms of governmental land-use control. Now, it is frequently stated that the aim of governmental land-use control is the minimization of land rentals. The reasons for this view are interesting but not relevant here. Its absurdity is readily seen by considering that an absolute minimum of land rentals could be achieved by forbidding land to be used for any purpose whatsoever.

Finally, for any pattern of locational differences in land rentals to be an equilibrium pattern, it is necessary that there be no unsatisfied buyers or sellers of any commodity at any point in space. For if there were, the prices of some commodities would rise or fall, and the maximum rentals offered for certain parcels of land would likewise change. As a result, it would be profitable for some landowners to change the use to which the land they own is put.

Having outlined in very general terms the principles underlying the determinants of differentials in land rentals with location, let us consider some specific forces governing actual rental differentials. It was noted earlier that the CBD is the area of maximum accessibility or minimum transport costs for the local product and labor market and that it is convenient to the rail lines serving as links to outside markets and material-supply sources. The relatively high cost of local movement because of traffic congestion in the center, especially during rush hours, may mean that prices received for products rapidly fall off or wages paid increase rapidly with movement away from the center. Where actual transport of goods is involved, the products of CBD firms are generally of high value in relation to weight and often involve small shipments or shippers, so that transport costs are relatively high. Finally, for the commercial, trade, and service firms that locate in the CBD it would seem that land is a relatively unimportant factor of production.

Agriculture, on the other hand, is probably the most land intensive of all economic activities, and shipments of agricultural products are frequently large and involve products of relatively low value in relation to weight, so that transport costs are relatively low. Thus, commercial and retail firms, residences, and agricultural firms are located in roughly annular zones surrounding the CBD, and land rentals decline at progressively lower rates in each of these zones.

There are, of course, many exceptions to the broadly annular zonal pattern of location and corresponding relative declines in land rentals surrounding the CBD. The two most important are the concentration of manufacturing in the vicinity of waterways, rail lines, and truck routes and the more or less regular hierarchical pattern of retail and service business. It is well known that the structure of transport costs is such that manufacturers and other processors tend to find locations at point material sources or markets less costly than intermediate ones. While sources of raw materials are rarely found inside city limits, rail lines, freight and truck terminals, and waterways are essentially point or linear material sources and markets for final products for shipment outside the city. The so-called light manufacturers, firms receiving or sending shipments in less than carload lots, find location close to freight terminals desirable. The same is true for wholesalers whose outbound shipments are frequently less than carload lots. Since land is probably a more important productive factor for light manufacturers and wholesalers than for commercial, retail, and service firms in the CBD proper, the former group tends to locate around the outer edges of the CBD. In this area of location, land rentals probably decline relatively less rapidly than within the CBD proper, although more rapidly than in the surrounding residential zone. Heavy manufacturers or firms receiving or making shipments in carload lots would find locations anywhere along rail lines or truck routes equally attractive. As a result there is no reason relating to transport costs on commodities to expect land rentals in immediate proximity to such routes to vary with location along them.

The tendency for retail and service business to concentrate in a hierarchy of centers of various sizes at more or less regularly spaced intervals or along major streets within a city is explained by central place theory [see Spatial Economics]. In addition, because certain facilities, such as parking lots, are shared, some costs are lower in shopping centers than elsewhere. The demand for any particular firm’s product is probably greater within a center because of the tendency for customers to make a variety of purchases during any given trip and to comparison shop, and the vicinities of certain points, such as intersections of major streets and rapid transit stops, are points of local minimum transport costs for many kinds of firms. The reasons given for the relative steepness of rental gradient within the CBD apply, but with diminished force, in these non-CBD retail and service centers. Hence, the rental value of land is likely to decline relatively rapidly in the vicinity of these outlying centers. It would appear that the peaks of land rentals are relatively higher in the centers belonging to higher levels of the hierarchy, the highest of which is the CBD, but there is no reason to expect the peaks of rental value in any given level of the hierarchy to vary systematically with location in the city.

Within the residential zone housing prices decline with distance from the CBD. If this were not the case, households located closer to the CBD, and bearing lower transport costs to and from it, would be better off than households in more distant locations. It would then be in the interest of the more distant households to offer more for housing closer to the CBD than its current inhabitants paid, and a decline in housing prices with distance from the CBD would result. Now, it can be shown that a necessary condition for household equilibrium is that the relative rate of decline in housing prices per mile, say, be numerically equal to a household’s additional expenditures on transportation per mile divided by its expenditure on housing. Households with relatively high transport costs, such as those with more than one worker employed in the CBD, have an incentive to locate close to the CBD. Those who spend greater amounts on housing likewise have an incentive to locate at greater distances. Thus, the relative rate of decline of housing prices is smaller in the outer parts of the city, and for this reason land rentals would decline at relatively slower rates at greater distances from the center. This last tendency is at least partly offset, however, by the fact that because of the less than unit elasticity of substitution of land for other factors, the relative importance of land in producing housing is smaller in the outer parts of cities. Because transport costs tend to be smaller for households located in the vicinity of rapid transit routes and express highways, land rentals decline relatively less rapidly with distance from the CBD in the neighborhood of these facilities.

Housing prices in cities, and thus land rentals, may vary for many other reasons. Since accessibility to local shopping and employment centers, rapid transit stops, and educational, cultural, or recreational centers has value because of the saving in transport costs, one might expect local variations in residential land rentals in the vicinity of the centers. In addition, the prices people are willing to pay for residences are undoubtedly influenced greatly by the character of the surrounding area. It would appear, for example, that housing prices, and thus residential land rentals, are lower in the immediate vicinity of local manufacturing centers and higher in higher-income neighborhoods and in the immediate vicinity of attractive natural surroundings.

Richard F. Muth

[See alsoSpatial Economics.]

BIBLIOGRAPHY

Hicks, John R. (1932) 1964 The Theory of Wages. New York: St. Martins.

Hoover, Edgar M.; and Vernon, Raymond 1959 Anatomy of a Metropolis: The Changing Distribution of People and Jobs Within the New York Metropolitan Region. Cambridge, Mass.: Harvard Univ. Press. → A paperback edition was published in 1962 by Double-day.

Hoyt, Homer 1933 One Hundred Years of Land Values in Chicago: The Relationship of the Growth of Chicago to the Rise in Its Land Values, 1830–1933. Univ. of Chicago Press.

Marshall, Alfred (1890)1961 Principles of Economics. 2 vols. 9th ed. New York and London: Macmillan. → See especially Book 5, Chapters 9–11, and Book 6, Chapter 9.

Muth, Richard F. 1961 Economic Change and Rural-Urban Land Conversions. Econometrica 29:1–23.

Ricardo, David (1817) 1962 Principles of Political Economy and Taxation. London: Dent; New York: Dutton.→ A paperback edition was published in 1963 by Irwin. See especially Chapter 2.

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Rent

Rent

ECONOMIC RENT

RENT-SEEKING

BIBLIOGRAPHY

The term rent has two meanings in economics and one taken from everyday usage. When a person leases an apartment or house from its owner, the lease provides for a payment to the owner. Although commonly called rent, it is very different in both orientation and calculation from the two uses in economics, namely, economic (or Ricardian) rent and rent-seeking, which are themselves very different from each other.

ECONOMIC RENT

The rent paid to an owner of leased property is a composite payment. It covers or includes the following items: the cost of the land, the cost of improvements, interest on the combined costs, the amount of appreciation of the land and improvement values, taxes, the cost of any services provided along with the leased property, and, given the overall workings of demand and supply, any further profit; all of which are calculated on a per-period basis. Should the owner have a mortgage, the owners receipt of rent enables the owner to accumulate equity in the property. Should the renter arrange with the present owner to purchase the property, it is the former renter, now owner, who accumulates equity in the property by paying off the mortgage, if any. The principal connection with economics, or economic theory, of such rent is that the rent paid for the leasing of the property must be worth its expenditure to the renter (including consideration of alternative leasing) and must be suitable, relative to the owners costs and alternative leasing), to warrant for both of them to enter into the rental contract, or lease.

The concept of economic rent stems from the English economists David Ricardo and Thomas Robert Malthus in the early nineteenth century. Ricardian, or economic, rent is the return to the owner of land (or any factor of production) that is fixed in supply and whose level is governed by the pressure of population growth. With trivial exceptions, such as filling in shallow bodies of water for one reason or another, the amount of land does not change with a change in the demand for it. The demand for land is driven by the need for land on which to grow crops and to erect homes. This need increases with population increase and is due solely to the growth of society. The increment in the price of land thus generated is widely considered unearned compared to situations in which investment in improving land and its appurtenances takes place.

Several additional features stemmed from early-nineteenth-century study. One feature is that land rent is differential with regard to location and to fertility. Increments or decrements of property value will reflect relative location and fertility, and likely will not be constant in either amount or percentage change. The second feature is a specific form of the first, namely, that as increasing levels of labor and capital are applied to the same amount of land, output per unit of input will fall. This is called diminishing returns. The third feature is due to the fact that not all land is equally fertile or located equidistant to a given point. This means that as the price of food increases due to the population-driven demand for food and thereby land, the increments of price (rent) of the more fertile or better situated land will increase more rapidly than those of less fertile or worse situated land. The fourth feature is that rent is a residual category such that any tax on land rent will have no disincentive effect on the level of food production on the land.

Given both that the increased price of pure, unimproved land is due to the growth of society and that any tax on the rent will have no adverse effects on incomemaximizing owner calculations and farming, it has followed for many economists that a tax on unimproved land would have no negative effects and would be a fit subject of taxation. Objection to this reasoning arose from those who felt that acquisition of the increased value was one of the rights of property. The rejoinder to that objection was this: Land-value increments being due to the growth of society and not the activities of the owner, not taxing land rent but maintaining the same governmental budget, meant that tax revenues would have to come from taxes levied on productive activities. Nevertheless, a tax on land-value increments conflicted with the principle of conservatism, that appropriation of the increase of value was a right of property. However, for the American economist Henry George (1839-1897), for example, whose reasoning was initially based on Ricardos, nothing was more conservative than promoting income in accordance with productivity rather than unearned increments.

The theory of Ricardian rent must be supplemented by consideration of the competition over pieces of land by people who had different, and conflicting, uses for the land. The idea of quasirent was developed by the English economist Alfred Marshall to identify the return to owners of factors of production, such as ones own labor or pieces of capital, that are in temporary inelastic supply.

RENT-SEEKING

The second notion of rent in economic theory is that of rent-seeking. The idea is that rent is the difference between two sets of rights, that people could invest money in efforts, through lobbying, legislation, and/or litigation, even bribery and extortion, to change the law in their favor, thereby increasing their incomes. Rent-seeking would engender counter-measures by those threatened with loss. The result would be wasted resources deployed in such activities. The objection to rent-seeking theory is that prohibition of such activity, were it actually possible, would remove the opportunity to address grievances, perpetuate the law in existence at the time of prohibition, and deny people their legal and constitutional rights, including their right to a lawyer, and their right to participate in government as well as limit competition. The perpetuation criticism is particularly objectionable, inasmuch as modern urban industrial society and political democracy would never have been feasible had the beneficiaries of the old post-feudal order had a veto, as it were, on legal, political, and social change. Anne Kruegers more limited model, centering on bribery and extortion, is much less amenable to criticism along these lines than several other broader and less discriminating versions of rent-seeking.

Both theories, Ricardian rent and rent-seeking, are greatly affected by the situation that, under post-feudal structures, land ownership conveyed important rights of governance and therefore control of social evolution.

SEE ALSO Returns, Diminishing; Ricardo, David

BIBLIOGRAPHY

Colander, David C., ed. 1984. Neoclassical Political Economy. Cambridge, MA: Ballinger.

George, Henry. [1884] 1982. The Land Question. New York: Schalkenbach Foundation.

Krueger, Anne O. 1974. The Political Economy of the Rent-Seeking Society. American Economic Review 64: 291-303.

Laurent, John, ed. 2003. Henry Georges Legacy in Economic Thought. Northampton, MA: Edward Elgar.

Ricardo, David. [1817] 1948. The Principles of Political Economy and Taxation. New York: E. P. Dutton.

Tullock, Gordon. 1989. The Economics of Special Privilege and Rent Seeking. Norwell, MA: Kluwer Academic Publishers.

Warren J. Samuels

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rent

rent, in law, periodic payment by a tenant for the use of another's property. In economics, its meaning is more complex, but since the word rent means any income or yield from an object capable of producing wealth, its limitation to a more special sense is somewhat arbitrary and justified only by a general consensus of opinion and usage. The term rent is now ordinarily used in the broad sense and, besides the return from land, includes the return from such things as tools, machinery, and houses. Objects are rented for a limited period of time and are generally expected to be returned in their original condition. The early English writers on economics (16th–18th cent.) used the word to mean interest on a loan, but its economic meaning gradually narrowed to the sense of the return on land. Modern rent doctrine began in the 18th cent. The physiocrats centered their economic system on land. They believed that rent was measured by the net product, i.e., the surplus over the cost of production. Because they identified wealth with fixed material objects, the physiocrats considered rent not as the variable yield from the land but as a fixed value, which they called "current price of leases" and "disposable revenue." Adam Smith attempted to formulate a "natural rate" of rent based on the laws of supply and demand. This rate would be an amount high enough to induce the landowner to keep his land in cultivation and low enough to allow the tenant to subsist. David Ricardo held that demand determined the amount of marginal land under cultivation, and that rent was determined by this margin, which had the highest costs of production. Ricardo attacked Smith for putting rent on the same footing with wages and profits as one of the costs of production. Ricardo thought that high or low wages and profits were the cause of high or low prices, while high or low rents were the effect of these prices. Critics of Ricardian theory, such as Henry George, argued that monopolistic control of rent was the cause of poverty, which could only be cured by converting private rights into public by the medium of a single tax on land. Economic rent is the difference between the compensation for a factor of production and the amount necessary to keep it in its current occupation. In economic theory, under perfect competition, there would be no economic rent. Ground rent is paid to a landowner for the lease of property, often under long-term leases (such as a 99-year lease).

See C. Rowley and R. D. Tollison, ed., The Political Economy of Rent Seeking (1988).

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rent

rent1 / rent/ • n. a tenant's regular payment to a landlord for the use of property or land. ∎  a sum paid for the hire of equipment. • v. [tr.] pay someone for the use of (something, typically property, land, or a car): they rented a house together in Spain | [as adj.] (rented) a rented apartment. ∎  (of an owner) let someone use (something) in return for payment: he purchased a large tract of land and rented out most of it to local farmers. ∎  [intr.] be let or hired out at a specified rate: skis or snowboards rent for $60–80 for six days. PHRASES: for rent available to be rented. rent2 • n. a large tear in a piece of fabric. ∎  an opening or gap resembling such a tear: they stared at the rents in the clouds. rent3 • past and past participle of rend.

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rent

rent1 †source of income XII; †revenue; †tax; payment made by tenant to landlord XIII. — (O)F. rente :- Rom. *rendita, f. *rendere RENDER.
So vb. †endow XIV; pay rent for XVI. — (O)F. renter. rental (-AL1) †rent-roll XIV; amount of rent XVII. — AN. rental or AL. rentāle.

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rent

rent2 tear in a piece of stuff. XVI. f. (dial.) rent tear, rend (XIV), var. of REND based on pt., pp. rent.

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rent

rentant, Brabant, Brandt, brant, cant, enceinte, extant, gallant, Kant, levant, pant, pointe, pointes, rant, scant •confidant • commandant • hierophant •Rembrandt • Amirante •gallivant •aren't, aslant, aunt, can't, chant, courante, détente, enchant, entente, grant, implant, Nantes, plant, shan't, slant, supplant, transplant, underplant •plainchant • ashplant • eggplant •house plant • restaurant •debutant, debutante •absent, accent, anent, ascent, assent, augment, bent, cement, cent, circumvent, consent, content, dent, event, extent, ferment, foment, forewent, forwent, frequent, gent, Ghent, Gwent, lament, leant, lent, meant, misrepresent, misspent, outwent, pent, percent, pigment, rent, scent, segment, sent, spent, stent, Stoke-on-Trent, Tashkent, tent, torment, Trent, underspent, underwent, vent, went •orient • comment • portent •malcontent

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