Economic Rent
   HOME

TheInfoList



OR:

In
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
, economic rent is any payment (in the context of a market transaction) to the owner of a
factor of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rel ...
in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (
land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various isla ...
) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In the
moral economy Moral economy refers to economic activities viewed through a moral, not just a material, lens. The definition of moral economy is constantly revisited depending on its usage in differing social, economic, ecological, and geographic situations and ...
of
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
, economic rent includes income gained by labor or state beneficiaries of other "contrived" (assuming the market is natural, and does not come about by state and social contrivance) exclusivity, such as labor guilds and unofficial corruption.


Overview

In the moral economy of the economics tradition broadly, economic rent is opposed to producer surplus, or
normal profit In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It i ...
, both of which are theorized to involve productive human action. Economic rent is also independent of opportunity cost, unlike
economic profit In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It ...
, where opportunity cost is an essential component. Economic rent is viewed as unearned revenue while economic profit is a narrower term describing surplus income earned by choosing between risk-adjusted alternatives. Unlike economic profit, economic rent cannot be theoretically eliminated by competition because any actions the recipient of the income may take such as improving the object to be rented will then change the total income to contract rent. Still, the total income is made up of
economic profit In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It ...
(earned) plus economic rent (unearned). For a produced commodity, economic rent may be due to the legal ownership of a
patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A ...
(a politically enforced right to the use of a process or ingredient). For education and
occupational licensing Occupational licensing, also called occupational licensure, is a form of government regulation requiring a license to pursue a particular profession or vocation for compensation. It is related to occupational closure. Professions that can have ...
, it is the knowledge, performance, and ethical standards, as well as the cost of permits and licenses that are collectively controlled as to their number, regardless of the competence and willingness of those who wish to compete on price alone in the area being licensed. In regard to labor, economic rent can be created by the existence of mass education, labor laws, state social reproduction supports, democracy, guilds, and labor unions (e.g., higher pay for some workers, where collective action creates a
scarcity In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
of such workers, as opposed to an ideal condition where labor competes with other factors of production on price alone). For most other
production Production may refer to: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production as a stati ...
, including agriculture and extraction, economic rent is due to a scarcity (uneven distribution) of natural resources (e.g., land, oil, or minerals). When economic rent is privatized, the recipient of economic rent is referred to as a '' rentier''. By contrast, in
production theory Production is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output. Ideally this output will be a good or service which has value a ...
, if there is no exclusivity and there is perfect competition, there are no economic rents, as competition drives prices down to their floor. Economic rent is different from other
unearned In baseball, an earned run is any run that was fully enabled by the offensive team's production in the face of competent play from the defensive team. Conversely, an unearned run is a run that would not have been scored without the aid of an err ...
and
passive Passive may refer to: * Passive voice, a grammatical voice common in many languages, see also Pseudopassive * Passive language, a language from which an interpreter works * Passivity (behavior), the condition of submitting to the influence of o ...
income, including contract rent. This distinction has important implications for public revenue and
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
policy. As long as there is sufficient
accounting profit Profit, in accounting, is an income distributed to the owner in a profitable market production process (business). Profit is a measure of profitability which is the owner's major interest in the income-formation process of market producti ...
, governments can collect a portion of economic rent for the purpose of
public finance Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achiev ...
. For example, economic rent can be collected by a government as royalties or extraction fees in the case of
resources Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon their av ...
such as minerals and oil and gas. Historically, theories of rent have typically applied to rent received by different factor owners within a single economy. Hossein Mahdavy was the first to introduce the concept of "
external rent External may refer to: * External (mathematics), a concept in abstract algebra * Externality, in economics, the cost or benefit that affects a party who did not choose to incur that cost or benefit * Externals, a fictional group of X-Men antago ...
", whereby one economy received rent from other economies.


Definitions

Late 1800s thinkers conceptualized economic rent as "''incomes analogous to land rents'' in the sense of rewarding control over persistently scarce or monopolised assets, rather than labour or sacrifice." Over time, economists shifted their definition of the term. Neoclassical economists defined economic rent as "income in excess of opportunity cost or competitive price." According to
Robert Tollison Robert D. Tollison (1942–October 24, 2016) was an American economist who specialized in public choice theory. Education A native of Spartanburg, South Carolina, Tollison attended local Wofford College where he earned an A.B. in business admin ...
(1982), economic rents are "excess returns" above the "normal levels" that are generated in competitive markets. More specifically, a rent is "a return in excess of the resource owner's opportunity cost".
Henry George Henry George (September 2, 1839 – October 29, 1897) was an American political economist and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of the Progressive Era. He inspired the eco ...
, best known for his proposal for a single tax on land, defines rent as "the part of the produce that accrues to the owners of land (or other natural capabilities) by virtue of ownership" and as "the share of wealth given to landowners because they have an exclusive right to the use of those natural capabilities." The law professors
Lucian Bebchuk Lucian Arye Bebchuk (born 1955) is a professor at Harvard Law School focusing on economics and finance. Bebchuck has a B.A. in mathematics and economics from the University of Haifa (1977), an LL.B. from the University of Tel Aviv (1979), an LL.M ...
and
Jesse Fried Jesse may refer to: People and fictional characters * Jesse (biblical figure), father of David in the Bible. * Jesse (given name), including a list of people and fictional characters * Jesse (surname), a list of people Music * ''Jesse'' ( ...
define the term as "extra returns that firms or individuals obtain due to their positional advantages." In simple terms, economic rent is an excess where there is no enterprise or costs of production.


Classical rent (land rent)

In political economy, including physiocracy, classical economics,
Georgism Georgism, also called in modern times Geoism, and known historically as the single tax movement, is an economic ideology holding that, although people should own the value they produce themselves, the economic rent derived from land—includi ...
, and other
schools of economic thought In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern ...
, land is recognized as an
inelastic In economics, elasticity measures the percentage change of one economic variable in response to a percentage change in another. If the price elasticity of the demand of something is -2, a 10% increase in price causes the demand quantity to fall ...
factor of production In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the rel ...
. Land, in this sense, means exclusive access rights to any natural opportunity. Rent is the share paid to freeholders for allowing production on the land they control.
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...
is credited with the first clear and comprehensive analysis of differential land rent and the associated economic relationships (
law of rent 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 purpo ...
).
Johann Heinrich von Thünen Johann Heinrich von Thünen (24 June 1783 – 22 September 1850), sometimes spelled Thuenen, was a prominent nineteenth century economist and a native of Mecklenburg-Strelitz, now in northern Germany.He "ranks alongside Marx as the greatest Ge ...
was influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was density of population, increasing the profitability of commerce and providing for the division and specialization of labor, that commanded higher municipal rents. These high rents determined that land in a central city would not be allocated to farming but be allocated instead to more profitable residential or commercial uses. Observing that a tax on the unearned rent of land would not distort economic activities,
Henry George Henry George (September 2, 1839 – October 29, 1897) was an American political economist and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of the Progressive Era. He inspired the eco ...
proposed that publicly collected land rents (
land value taxation A land value tax (LVT) is a levy on the value of land (economics), land without regard to buildings, personal property and other land improvement, improvements. It is also known as a location value tax, a point valuation tax, a site valuation ta ...
) should be the primary ( or only) source of public revenue, though he also advocated public ownership, taxation, and regulation of
natural monopolies A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
and monopolies of scale that cannot be eliminated by regulation.


Neoclassical Paretian rent

Neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
extends the concept of rent to include factors other than natural resource rents. * "The excess earnings over the amount necessary to keep the factor in its current occupation." * "The difference between what a factor of production is paid and how much it would need to be paid to remain in its current use." * "A return over and above opportunity costs, or the normal return necessary to keep a resource in its current use."Preview.
/ref> The labeling of this version of rent as "Paretian" may be a misnomer in that
Vilfredo Pareto Vilfredo Federico Damaso Pareto ( , , , ; born Wilfried Fritz Pareto; 15 July 1848 – 19 August 1923) was an Italians, Italian polymath (civil engineer, sociologist, economist, political scientist, and philosopher). He made several important ...
, the economist for whom this kind of rent was named, may or may not have proffered any conceptual formulation of rent.


Monopoly rent

Monopoly rent refers to those economic rents derived from monopolies, which can result from (1) denial of access to an asset or (2) the unique qualities of an asset. Examples of monopoly rent include: rents associated from legally enforced knowledge
monopolies A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...
derived from intellectual property like patents or copyrights; rents associated with 'de facto' monopolies of companies like
Microsoft Microsoft Corporation is an American multinational technology corporation producing computer software, consumer electronics, personal computers, and related services headquartered at the Microsoft Redmond campus located in Redmond, Washing ...
and
Intel Intel Corporation is an American multinational corporation and technology company headquartered in Santa Clara, California. It is the world's largest semiconductor chip manufacturer by revenue, and is one of the developers of the x86 seri ...
who control the underlying standards in an industry or product line (e.g. Microsoft Office); rents associated with 'natural monopolies' of public or private utilities (e.g. telephone, electricity, railways, etc.); and rents associated with network effects of platform technologies controlled by companies like Facebook, Google, or Amazon. An antitrust probe described Google Play and Apple App Store fees as "monopoly rents".


Labour

The generalization of the concept of rent to include opportunity cost has served to highlight the role of political barriers in creating and privatizing rents. For example, a person seeking to become a member of a medieval
guild A guild ( ) is an association of artisans and merchants who oversee the practice of their craft/trade in a particular area. The earliest types of guild formed as organizations of tradesmen belonging to a professional association. They sometimes ...
makes a huge investment in training and education, which has limited potential application outside of that guild. In a competitive market, the wages of a member of the guild would be set so that the expected net return on the investment in training would be just enough to justify making the investment. In a sense, the required investment is a natural barrier to entry, discouraging some would-be members from making the necessary investment in training to enter the competitive market for the services of the guild. This is a natural "free market" self-limiting control on the number of guild members and/or the cost of training necessitated by certification. Some of those who would have opted for a particular guild may decide to join a different guild or occupation. However, a political restriction on the number of people entering into the competitive market for services of the guild has the effect of raising the return on investments in the guild's training, especially for those already practicing, by creating an artificial scarcity of guild members. To the extent that a constraint on entrants to the guild actually increases the returns to guild members as opposed to ensuring competence, then the practice of limiting entrants to the field is a
rent-seeking Rent-seeking is the act of growing one's existing wealth without creating new wealth by manipulating the social or political environment. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effi ...
activity, and the excess return realized by the guild members is economic rent. The same model explains the high wages in some modern professions that have been able to both obtain legal protection from competition and limit their membership, notably
medical doctors Doctor of Medicine (abbreviated M.D., from the Latin ''Medicinae Doctor'') is a medical degree, the meaning of which varies between different jurisdictions. In the United States, and some other countries, the M.D. denotes a professional degree. T ...
,
actuaries An actuary is a business professional who deals with the measurement and management of risk and uncertainty. The name of the corresponding field is actuarial science. These risks can affect both sides of the balance sheet and require asset man ...
, and
lawyers A lawyer is a person who practices law. The role of a lawyer varies greatly across different legal jurisdictions. A lawyer can be classified as an advocate, attorney, barrister, canon lawyer, civil law notary, counsel, counselor, solicitor, ...
. In countries where the creation of new
universities A university () is an institution of higher (or tertiary) education and research which awards academic degrees in several academic disciplines. Universities typically offer both undergraduate and postgraduate programs. In the United States, ...
is limited by legal charter, such as the UK, it also applies to
professors Professor (commonly abbreviated as Prof.) is an academic rank at universities and other post-secondary education and research institutions in most countries. Literally, ''professor'' derives from Latin as a "person who professes". Professors ...
. It may also apply to careers that are inherently competitive in the sense that there is a fixed number of slots, such as football league positions, music charts, or urban territory for illegal drug selling. These jobs are characterised by the existence of a small number of rich members of the guild, along with a much larger surrounding of poor people competing against each other under very poor conditions as they "pay their dues" to try to join the guild. (Reference: "Freakonomics: Why do drug dealers live with their Moms?").


Terminology relating to rent

; Gross rent: Gross rent refers to the rent paid for the services of land and the capital invested on it. It consists of economic rent, interest on capital invested for improvement of land, and reward for the risk taken by the landlord in investing his or her capital. ; Scarcity rent: Scarcity rent refers to the price paid for the use of homogeneous land when its supply is limited in relation to demand. If all units of land are homogeneous but demand exceeds supply, all land will earn economic rent by virtue of its scarcity. ; Differential rent: Differential rent refers to the rent that arises owing to differences in fertility of land. The surplus that arises due to difference between the marginal and intra-marginal land is the differential rent. It is generally accrued under conditions of extensive land cultivation. The term was first proposed by David Ricardo. ; Contract rent: Contract rent refers to rent that is mutually agreed upon between the landowner and the user. It may be equal to the economic rent of the factor. ; Information rent: Information rent is rent an agent derives from having information not provided to the principal.


See also

*
Georgism Georgism, also called in modern times Geoism, and known historically as the single tax movement, is an economic ideology holding that, although people should own the value they produce themselves, the economic rent derived from land—includi ...
* Ground rent *
Land (economics) In economics, land comprises all naturally occurring resources as well as geographic land. Examples include particular geographical locations, mineral deposits, forests, fish stocks, atmospheric quality, geostationary orbits, and portions of t ...
*
List of economics topics The following outline is provided as an overview of and topical guide to economics: Economics – analyzes the production, distribution, and consumption of goods and services. It aims to explain how economies work and how economic agen ...
*
Quasi-rent Quasi-rent or Marshallian rent is a temporary economic rent like returns to a supplier/owner. Alfred Marshall was the first to observe quasi-rents. Quasi-rent differs from pure economic rent in that it is a temporary phenomenon. It can arise fro ...
*
Rent-seeking Rent-seeking is the act of growing one's existing wealth without creating new wealth by manipulating the social or political environment. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effi ...
* FIRE economy (finance, insurance and real estate) *
Rentier state In current political-science and international-relations theory, a rentier state is a state which derives all or a substantial portion of its national revenues from the rent paid by foreign individuals, concerns or governments.Mahdavy 1970, p. ...
*
Hotelling's rule Hotelling's rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. The maximum rent is also known as Hotelling rent or scarcity rent and is the maximu ...
*
Law of rent 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 purpo ...
*
Schumpeterian rent Schumpeterian rents are earned by innovators and occur during the period of time between the introduction of an innovation and its successful diffusion. It is expected that successful innovations, in time, will be imitated, but until that occurs, t ...
*
Johann Heinrich von Thünen Johann Heinrich von Thünen (24 June 1783 – 22 September 1850), sometimes spelled Thuenen, was a prominent nineteenth century economist and a native of Mecklenburg-Strelitz, now in northern Germany.He "ranks alongside Marx as the greatest Ge ...
*
Differential and absolute ground rent Differential may refer to: Mathematics * Differential (mathematics) comprises multiple related meanings of the word, both in calculus and differential geometry, such as an infinitesimal change in the value of a function * Differential algebra * ...
*
Property income Property income refers to profit or income received by virtue of owning property. The three forms of property income are rent, received from the ownership of natural resources; interest, received by virtue of owning financial assets; and profit, ...
*
Unearned income Unearned income is a term coined by Henry George to refer to income gained through ownership of land and other monopoly. Today the term often refers to income received by virtue of owning property (known as property income), inheritance, pensions ...


References


Further reading

* :*''See also'': ::* ::*


External links


Definition of economic rent at Economist.com


a series of seminars at Queen Mary University of London.
''Rent-Seeking Network''
Rent-Seeking papers by Behrooz Hassani

{{Microeconomics Renting Public choice theory Scarcity