The law of rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor and capital.
The law of rent was formulated by David Ricardo around 1809, and presented in its most developed form in his magnum opus, On the Principles of Political Economy and Taxation.
[1] Ricardo formulated this law based on the principles put forth by Adam Smith in Wealth of Nations.
David Ricardo elaborates on the significance of land on relative prices through his Theory of Rent.
However, the profit the producer obtains from their production from the land accounts for the price difference in rent (Kishtainy 2018, p. 39).
[5] Ricardo's Theory of Rent illustrates the effect of the third factor of production, land, on the prices of goods.
He was primarily interested in the economic rent and locational value associated with private appropriation of any natural factor of production.
[citation needed] Note that Ricardo's original formulation assumes that the best quality land would be the first to be used in production, and that goods are sold in a competitive, single price market.
On the Principles of Political Economy, and Taxation, Ricardo supposes that the land generates profits of 100, 90, and 80 units of corn, depending on quality.