Rent and the Law of Diminishing Returns

A close examination of the Ricardian theory of rent shows that there is a causal relation between the operation of diminishing returns and the emergence of rent. The necessity of extensive cultivation arises because of the operation of diminishing returns. Extensive cultivation refers to the practice of bringing more land into cultivation to increase production. Had there been no diminishing returns, it would have been possible to ever increase the output of food grains by applying more and more labour and capital in best grade land and there would have been no necessity of extending the area of cultivation from more fertile to less fertile land. In that case no rent would arise in the differential sense.

In case of intensive cultivation also rent arises due to the operation of diminishing returns. If we apply equal doses of labour and capital and cultivate a piece of land again and again, the marginal product of additional dose of labour and capital declines. In other words, marginal cost of additional output increases as we produce more from the same piece of land. Since marginal cost determines price, the earlier investments which had given us increased output produce a surplus. This surplus is called rent.