Q.Explain the modern (scarcity) theory of rent based on the concept of transfer earnings.
You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
Start your 14-day free trial to unlock the full solution →The modern (scarcity) theory of rent generalises Ricardo's differential theory using the concept of transfer earnings — the minimum payment a factor must receive to remain in its current use, equal to what it could earn in its next-best alternative employment. Any payment the factor receives above its transfer earnings is defined as economic rent:
Unlike Ricardo's theory, which is tied specifically to differences in the fertility of agricultural land, the modern theory locates the source of rent in scarcity relative to demand. Any factor whose supply is inelastic — that cannot be readily increased in response to a rise in demand — can earn economic rent, whether that factor is land, a rare natural talent, a uniquely located commercial property, or any specialised skill in short supply. A factor in perfectly elastic supply, by contrast, earns no rent at all, because its entire earnings equal its transfer earnings; there is no surplus to withdraw it from its use. …
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.