Economic rent

From Academic Kids

In economic theory, economic rent is a payment to a factor of production or input in excess of that which is needed to keep it employed in its current use. The major components of economic rent include monopoly rent (income that accrues due to some degree of monopoly power) and land rent.

In classical economics, "rent" referred to a specific kind of income received by the owners of land and other gifts of nature (natural resources) and was thus often called "land rent." To Karl Marx and Henry George, this land-rent was seen as a form of exploitation. Land-owners were able to get "something for nothing" just because they controlled such important natural resources. (To Marx, the land-owners received a part of capitalist society's surplus-value that was redistributed from the industrial sector, where workers produced it.)

Modern neoclassical economics has generalized this theory to suggest that the owner of any kind of input can receive economic rent due to unique qualities of that input. Rent is thus a payment received for special advantages of any sort. For example, an excellent professional basketball player typically earns much more income than is necessary to compensate him or her for the training, effort, practice, and the like needed to become a player. The payment may not always be in terms of money. It may also come in terms of the privileges of fame.

Because receiving a rent involves an individual or corporation getting "something for nothing", economists see them as investing in rent seeking activities, i.e. spending to get special privileges from the government or from market positions.


Two types of factor rent

  • Classical factor rent -- This is the return to a factor above and beyond the amount necessary to induce the supplier to offer the input to the market. This corresponds to the notion of a producers' surplus or "scarcity rent." This type of economic rent arises because of scarcity in the supply of inputs. If factor supply is perfectly elastic, there would be no producers' surplus and no economic rents.
  • Paretian factor rent - This is the return to a factor above and beyond the amount that the factor supplier would receive in its next-best alternative use. This type of economic rent draws on the notion of opportunity costs. For example, if someone is earning $20,000 for a job, and the next best job pays $15,000, then the economic rent is the difference between the two of $5,000.

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