Economic Rent

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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.

BREAKING DOWN '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.
 

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