Rent and Producer's Surplus: Reply
Abstract
studies. Certainly the Mishan proposition on these grounds could at least lead to serious confusion. Even worse, however, is the fact that the sum of the Coimipensating Variations (or Equivalent Variations) for the series of price change from zero to some given market price does not equal the areas under the supply curve of the factor except in the limiting case referred to above; i.e., where the welfare supply elasticity of the supply of X is zero. Thus we would have two measures of total rent or welfare change neither of which, except under very unusual circumstances, would equal the payments traditionally viewed as rent.' Thus, following Mishan's suggestion would lead us to use a rent concept which would be botlh ambiguous and not directly related to factor payments. Such a concept would be of little value in the theory of cost and the theory of distribution which are concerned with specific payments. These are the very areas where the idea of economic rent is most useful. Consequently Mishan's suggestion should be rejected and a more traditional concept of rent retained.2 If the definitions of rent are left undisturbed, what type of concept can be employed to parallel consumer surplus? Since none of this is intended to dispute Mishan's claim that the Compensating Variation and the Equivalent Variation are good measures of the welfare change engendered by factor price variations there is no reason the CV and the EV cannot be used in this way. They merely should not be called rent. It should be sufficient merely to refer to the Compensating Variation and the Equivalent Variation as measures of welfare change resulting from factor price changes. If that is not adequate and a specific term is required, producer's could well be redefined in this manner-as the CV and EV. Such a definition would directly parallel Hicks' concepts of consumer surplus and the terminology would directly follow from Mishan's main theoretical contribution, namely, applying Hicks' consumer price change analysis to factor price variations.
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