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. Owners' Equivalent Rent - OER

    The amount of rent that could be paid to substitute a currently ...
  2. Rent Ceiling

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

    The cost incurred by a business to utilize property. Business ...
  4. Rent Regulation

    A law that limits the amount and frequency with which landlords ...
  5. Rent Guarantee Insurance

    Insurance bought by a tenant that pays the monthly rent for a ...
  6. Price-to-Rent Ratio

    A mathematical calculation utilized in the Trulia Rent Vs. Buy ...
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

    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.
  3. 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.
  4. 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 ...
  5. 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.
  6. Investing

    Reasons Renting Is Better Than Buying

    Owning a home is much more expensive than renting. Here are the places where the costs differ greatly.
  7. 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.
  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

    Buying vs. Renting in the San Francisco Bay Area

    Buying vs. renting in the San Francisco Bay Area is a conundrum: Both are pricey. How to decide.
RELATED FAQS
  1. 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 >>
  2. 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. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  3. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  4. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  5. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  6. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
Trading Center