Determination of Economic Rent

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Is the price paid for the use of land or natural resources whose supply is perfectly inelastic ---meaning that no matter what is the rate of rent, determined by market or otherwise, its quantity cannot and does not change unlike other resources.

The supply of land is perfectly inelastic because the quantity available is fixed and determined by nature. Supply has no influence in determining economic rent.

Demand is the only determinant of economic rent. As demand increases or decreases economic rent will increase or decrease given the perfectly inelastic supply of land.

Economic rent offers no incentive given the fixed supply of land. Increasing economic rent will not bring forth more quantity as is the case with other natural resources.

Since land as a resource is a free gift of nature, at least for the original settler, any payment received by the owner, therefore is considered by economists as a surplus payment. That is why that payment for the use land is called pure or economic rent.

As population grows, the demand for land increases for farming as well as housing. Supply of land remaining same, that surplus paid to the landowners keeps increasing. That is why socialists have argued that land rent is unearned income and that either land should be nationalized or land rents should be taxed away.

Determining land rent: Rent is determined by the demand for land interact¬ing with a fixed - perfectly inelastic--supply of land. Moreover in economics land is not just the land we cultivate or build structures or highways on, it is also coal, iron, minerals, mountains, rivers, oceans, and oil among other things.

Since the supply oil cannot easily be increased, that is why as the demand for oil is rising faster than its supply, the crude oil prices have hit the roof in recent years. One of these we will run out of oil. Thus, in general the prices of natural resources tend to rise and seldom fall.

 

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