Loading the player...

What is 'Economic Rent'

Economic rent is an excess payment made to or for a factor of production over the amount required by the property owner to proceed with the deal. This often occurs when a buyer, working to attain a good or service that is considered exclusive, makes an offer prior to hearing what a seller considers an acceptable price. Market imperfections lead to the rise of economic rent; it would not exist if markets were perfect, since competitive pressures would drive down prices.

BREAKING DOWN 'Economic Rent'

As economic rent arises from conditions of scarcity, the concept can be used to demonstrate numerous pricing discrepancies. These include higher pay for unionized workers compared to non-unionized workers, or 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.

This term differs from the traditional use of the word "rent," which applies to payments received in exchange for temporary use of a particular good or property.

Economic Rent and Labor

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, which can also be referred to as unearned income.

In this regard, unearned income refers to the amount offered that is above what the employee felt that her skills and abilities were worth in the current marketplace. It can also apply when a person's skills would be valued less in an open market, but she receives more due to an affiliation with a group, such as a union, that sets minimum standards of pay.

Economic Rent and Facilities

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.

It can also refer to a situation where two properties exist with the exact same features except for location. If one location is preferable to another, the owner of the preferred location receives a higher payment than the other without having to complete any additional work. The lack of additional labor on the part of the owner can also be considered unearned income.

RELATED TERMS
  1. Rent Control

    A price control that limits the amount a property owner can charge ...
  2. Owners' Equivalent Rent - OER

    The amount of rent that could be paid to substitute a currently ...
  3. Rent Expense

    The cost incurred by a business to utilize property. Business ...
  4. One Percent Rule

    A rule of thumb used to determine if the monthly rent earned ...
  5. Ground Rent Arrangement

    A situation in which someone owns a structure but not the land ...
  6. Rent Guarantee Insurance

    Insurance bought by a tenant that pays the monthly rent for a ...
Related Articles
  1. Insights

    What is Economic Rent?

    Economic rent typically occurs when a product, service or property is in short supply, but demand is high.
  2. Investing

    The Complete Guide To Real Estate Renting

    Everything you need to know about renting property.
  3. Insurance

    Can You Make Money Renting Your Property?

    Current market conditions may make your home a tough sell. It could be time to consider renting your property until a profitable sale is possible.
  4. Investing

    10 Cities Where Rent Is Rising Fastest

    Rents are rising in 34 of the 35 largest U.S. metros, but salaries are not keeping pace. Here's where you're most likely to feel the pinch.
  5. Investing

    Can't Sell Your Home? Rent It

    Find out how to profit from your property when the housing market dips.
  6. Investing

    Do You Need A Rent Receipt?

    Landlords don't always bother to send receipts to renters. But there are important reasons renters should insist on getting proof they paid their rent.
  7. Investing

    Is Homeownership A Smart Investment Again?

    Homeownership remains cheaper than renting across the nation. However, these findings speak broadly to the national market, and there are several situations where it still makes more sense to ...
  8. Taxes

    Top 10 Cities to Invest in Rental Properties

    With home ownership out of reach, many Millennials are opting to rent single-family homes, which has created an opportunity for investors.
  9. Taxes

    Tax Rules For Renting Out Your Vacation Home

    Here's a rundown of the specific tax rules that apply to homeowners renting out a vacation property.
  10. Insurance

    When Is Rent Guarantee Insurance a Good Idea?

    Prospective renters are turning to rent guarantee insurance to boost their chances of getting approved by a landlord or management company. Is it worth it?
RELATED FAQS
  1. Can unearned rent be considered deferred revenue?

    Learn whether unearned rent can be considered deferred revenue. Understand what accounting practices are used to account ... Read Answer >>
  2. What is the difference between capitalization rate and rent?

    Find out the difference between capitalization rate and rent and why they are so important to making wise investments. Read Answer >>
Hot Definitions
  1. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  3. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  4. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  5. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  6. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
Trading Center