Economic Rent

AAA

DEFINITION of 'Economic Rent'

An excess payment made to or for a factor of production over and above the amount expected by its owner. Economic rent is the positive difference between the actual payment made for a factor of production (such as land, labor or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity. Economic rent arises due to market imperfections; it would not exist if markets were perfect, since competitive pressures would drive down prices. Economic rent should not be confused with the more commonly used “rent,” which simply refers to a payment made for temporary use of an asset or property.

INVESTOPEDIA EXPLAINS 'Economic Rent'

As economic rent arises from conditions of exclusivity or scarcity, the concept can be used to demonstrate numerous pricing discrepancies in the real world. These range from the higher pay for unionized workers compared to non-unionized workers, to the huge salaries made by a star athlete or sportsperson versus an average individual. Economic rent also explains the high value of intangible assets such as patents and permits.

For example, a worker may be willing to work for $15 per hour, but because she belongs to a union, she receives $18 per hour for the same job. The difference of $3 is the worker’s economic rent. As another example, the owner of a property in an exclusive shopping mall may be willing to rent it out for $10,000 per month, but a company that is keen to have a retail storefront in the mall may offer $12,000 as monthly rent for the property to secure it and forestall competition. The difference of $2,000, in this case, is the owner’s economic rent.
 

RELATED TERMS
  1. Capital

    1) Financial assets or the financial value of assets, such as ...
  2. Economy

    The large set of inter-related economic production and consumption ...
  3. Land

    Property or real estate, not including buildings or equipment, ...
  4. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  5. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  6. Full Employment

    A situation in which all available labor resources are being ...
Related Articles
  1. Understanding Supply-Side Economics
    Economics

    Understanding Supply-Side Economics

  2. Understanding The Consumer Confidence ...
    Economics

    Understanding The Consumer Confidence ...

  3. The Importance Of Inflation And GDP
    Economics

    The Importance Of Inflation And GDP

  4. What Are Economies Of Scale?
    Economics

    What Are Economies Of Scale?

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center