Economic Rent

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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.

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