Absolute and differential rent of land

Often the landlord for a fee leases land to the tenant who uses this land for agricultural production.With obtained from the sale of the fruits of their labor earnings he pays the owner of the land for rent.It is this board is called rent.

rents land

Land differ from each other in that one is in a favorable climatic zones, while others - under unfavorable.There is also a difference in the location: there are areas which are environmentally friendly in remote areas, or, conversely, close to major 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 the agricultural products produced in areas that have monopolized natural force, and the market price.

differential rent appears in two versions:

  • In the first case, it is an additional net income arising from the conduct of activities in the best fertility and location of plots of land.These indicators provide the necessary conditions for reducing individual cost of production.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 amount of additional revenue increases and forms a material ground rent.This land rents fully assigned to the landowner, since it is established they have already given the quality of the site.
  • In the second case it is presented in the form of net income, which is generated as a result of intensive farming.Assuming constant economic investments to improve fertility and the value obtained such rents.It is fully assigned to the lessee, as of his efforts depends on the value of the rent.

differential rent in the second case - it's an incentive to agriculture.It differs from the first in that is assigned by the tenant before the contract expires.But upon its expiry, this differential rent of land becomes the property of the landowner.It is one of the negative consequences of the introduction of market economy in the agricultural sector.

Differential rent can be formed not only exclusively in agriculture, but also in the mining industry.The conditions of its formation and the value is the same as in agriculture.Where the natural resources assigned to the owners or businesses, and there is a difference in the productivity of labor (mine rich, strategically located piece of land or forest) is formed that same differential rent.

consider another type. Absolute rent land - a mechanism for the economy, which entails a prudent attitude toward the ground.This type of annuity is produced as a result of inelastic supply of land, if it is privately owned.As you know, the land suitable for agricultural use of high-grade, not enough to ensure everyone.But landlords ask higher rents for any station, no matter what the fertility of the land and the location.And tenants to be able to pay rent, forced to inflate the prices of agricultural products.

This kind of rent the owner assigns their site as payment for rent is absolutely limited resource.