Whether we consider agricultural or grazing or forest land or land for any other purpose, there are tracts of different degrees of productiveness employed in producing for the same market. For example, in the case of agricultural production, there is usually found land of much fertility the products of which compete in the market with the products of land the fertility of which is so low or the location of which is so poor that the selling price of the products barely suffices to pay the necessary costs of production and leaves nothing over for rent. The English economist, Ricardo, writing early in the nineteenth century, explained that the rent of any particular piece of land is equal to the difference between the produce of that land and the produce of an equal area of land actually cultivated to supply the same market, but of such poor quality as not to command a rent.

To illustrate this principle, let us suppose a newly settled country where there is an abundance of fertile land as compared with the population. This fertile land, let us say, produces twenty-five bushels of wheat to the acre. There is also a large expanse of land of a second quality which yields under the same kind of cultivation twenty bushels, and there is still a third quality of land which yields fifteen bushels if similarly cultivated. The new settlers, relatively few in number, will cultivate only the land of the best quality (assuming that this land is not handicapped as compared with other lands by location, difficulty of cultivation, etc.). As there is land enough and to spare of the first quality, no one thinks of paying a rent for its use, since if he were asked to do so, he would apply his labor to another tract of land of the first quality (assuming that all of the land owners have not entered into a conspiracy to monopolize the land). But as soon as population has so far increased as to make it necessary to cultivate second quality land, rent will commence on first quality land, because a cultivator of first quality land may no longer choose other first quality land when he is asked to pay rent, but if he makes a change, he must now go to second quality land. Since the same efforts will produce twenty-five bushels on the first quality land or twenty bushels on the second quality land, he can as profitably remain on first quality land and pay five bushels rent as move to the second quality land and get it rent free. In either case he will receive net twenty bushels per acre.

The use of the second quality land can be had without payment of rent for the same reason that in the earlier stage the use of the first quality land could be had on like conditions. There is a superabundance of it relatively to the need for it. It is still a free good. Population continues to grow and all of the second quality land is finally occupied. As the third quality land begins to be cultivated, although it can be had without the payment of rent, the second quality land begins to command a rent and the rental of the first quality land is further increased. This is so for the reason that it is now a matter of indifference to the cultivator whether he pays ten bushels an acre for the use of first quality land, five bushels an acre for the use of second quality land, or nothing for the use of third quality land. In any case, he has fifteen bushels an acre remaining to recompense him for the use of his capital and labor. From this illustration it will be seen that although differences in the qualities of land do not cause rent, such differences do serve to measure the amount of rent where there is no-rent land from which to measure and where such no-rent land actually competes with the land whose rent is to be measured.