Economic Rent

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.
 



comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center