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 Ceiling

    A maximum price a landlord is allowed to charge for rent. Rent ...
  4. Rent Expense

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

    A rule of thumb used to determine if the monthly rent earned ...
  6. Rent Regulation

    A law that limits the amount and frequency with which landlords ...
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. Investing

    Can't Sell Your Home? Rent It

    Find out how to profit from your property when the housing market dips.
  4. 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.
  5. Investing

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  6. 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.
  7. Investing

    8 Must-Have Numbers For Evaluating A Real Estate Investment

    These calculations can help you figure out if a particular property will be a valuable investment.
  8. Managing Wealth

    Rent vs. Buy: It’s Different for Expensive Property

    For multi-million dollar homes, renting often nets out as costing less than the expenses/other financials of buying a comparable property.
  9. Investing

    4 Reasons Why Renting a Home is a Wise Decision

    We've all heard that a home is a great investment, but is it really? In this article, we will look at four reasons why renting could be wiser than homeownership.
  10. Investing

    Top Tips For Successfully Renting Out Your Home

    Renting out your home can be a great way to ride out a real estate slump - if you do it right.
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 >>
  3. What's the difference between economic value added (EVA) and economic rent?

    Understand the difference between economic value added and economic rent. Learn what each economic principle is used to measure ... Read Answer >>
  4. How do prepaid expenses affect liquidity ratio calculations?

    Understand how prepaid expenses affect a company's liquidity ratio calculations. Learn about the most common types of liquidity ... Read Answer >>
  5. How are prepaid expenses recorded on an income statement?

    Understand how prepaid expenses are recorded on a company's financial statements. Learn why a prepaid expense would be considered ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center