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.


Loading the player...

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.

  1. Capital

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

    A situation in which all available labor resources are being ...
  3. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  4. Land

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

    The field of economics that studies the behavior of the aggregate ...
  6. Economy

    The large set of inter-related economic production and consumption ...
Related Articles
  1. Economics

    Understanding Supply-Side Economics

    Does the amount of goods and services produced set the pace for economic growth? Here are the arguments.
  2. Economics

    Understanding The Consumer Confidence Index

    We look at this closely watched economic indicator to see what it means and how it's calculated.
  3. Economics

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  4. Economics

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  5. Investing

    3 Secrets Of Successful Companies

    Make smart investments by spotting up-and-coming success stories early.
  6. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  7. Term

    Public Goods & Free Riders

    A public good is an item whose consumption is determined by society, not individual consumers.
  8. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  9. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  10. Fundamental Analysis

    Emerging Markets: Analyzing Colombia's GDP

    With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy.
  1. What's the difference between economic value added (EVA) and economic rent?

    Economic value added (EVA) measures the performance of a company's management team by comparing operating profit to total ... Read Full Answer >>
  2. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  3. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  4. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  5. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
  6. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!