In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
, economic rent is any payment to the owner of a
factor of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilised amounts of the various inputs determine the quantity of output according to the rela ...
in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (
land
Land, also known as dry land, ground, or earth, is the solid terrestrial surface of Earth not submerged by the ocean or another body of water. It makes up 29.2% of Earth's surface and includes all continents and islands. Earth's land sur ...
) and for assets formed by creating official
privilege over natural opportunities (e.g.,
patents
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling discl ...
). In the
moral economy of
neoclassical economics
Neoclassical economics is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a go ...
, assuming the market is natural, and does not come about by state and social contrivance, economic rent includes income gained by labor or state beneficiaries or other "contrived" exclusivity, such as labor guilds and unofficial corruption.
Overview
In the moral economy of the economics tradition broadly, economic rent is distinct from
producer surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
* Consumer surplus, or consumers' surplus, is the monetary gain ...
, or
normal profit, both of which are theorized to involve productive human action. Economic rent is also independent of
opportunity cost
In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...
, unlike
economic profit
In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as surplus value. It is equal to total revenue minus total cost, including both explicit an ...
, where opportunity cost is an essential component. Economic rent is viewed as unearned revenue while economic profit is a narrower term describing surplus income earned by choosing between risk-adjusted alternatives. Unlike economic profit, economic rent cannot be theoretically eliminated by competition because any actions the recipient of the income may take, such as improving the object to be rented, will then change the total income to
contract rent. Still, the total income is made up of
economic profit
In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as surplus value. It is equal to total revenue minus total cost, including both explicit an ...
(earned) plus economic rent (unearned).
For a produced commodity, economic rent may be due to the legal ownership of a
patent
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling discl ...
(a politically enforced right to the use of a process or ingredient). For education and
occupational licensing
Occupational licensing, also called licensure, is a form of government regulation requiring a license to pursue a particular profession or vocation for compensation. It is related to occupational closure.
Some claim higher public support for t ...
, it is the knowledge, performance, and ethical standards, as well as the cost of permits and licenses that are collectively controlled as to their number, regardless of the competence and willingness of those who wish to compete on price alone in the area being licensed. In regard to labor, economic rent can be created by the existence of mass education, labor laws, state social reproduction supports, democracy, guilds, and labor unions (e.g., higher pay for some workers, where collective action creates a
scarcity
In economics, scarcity "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each economic good. ...
of such workers, as opposed to an ideal condition where labor competes with other factors of production on price alone). For most other
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stat ...
, including agriculture and extraction, economic rent is due to a scarcity (uneven distribution) of natural resources (e.g., land, oil, or minerals).
When economic rent is privatized, the recipient of economic rent is referred to as a ''
rentier''.
By contrast, in
production theory
Production is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output. Ideally this output will be a good or service which has value ...
, if there is no exclusivity and there is
perfect competition
In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoret ...
, there are no economic rents, as competition drives prices down to their floor.
Economic rent is different from other
unearned and
passive
Passive may refer to:
* Passive voice, a grammatical voice common in many languages, see also Pseudopassive
* Passive language, a language from which an interpreter works
* Passivity (behavior), the condition of submitting to the influence of ...
income, including
contract rent. This distinction has important implications for public revenue and
tax
A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...
policy.
As long as there is sufficient
accounting profit
Profit, in accounting, is an income distributed to the owner in a profitable market production process (business). Profit is a measure of profitability which is the owner's major interest in the income-formation process of market producti ...
, governments can collect a portion of economic rent for the purpose of
public finance
Public finance refers to the monetary resources available to governments and also to the study of finance within government and role of the government in the economy. Within academic settings, public finance is a widely studied subject in man ...
. For example, economic rent can be collected by a government as
royalties
A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset or ...
or
extraction fees in the case of
resources
''Resource'' refers to all the materials available in our environment which are Technology, technologically accessible, Economics, economically feasible and Culture, culturally Sustainability, sustainable and help us to satisfy our needs and want ...
such as minerals and oil and gas.
Historically, theories of rent have typically applied to rent received by different factor owners within a single economy. Hossein Mahdavy was the first to introduce the concept of "
external rent
External may refer to:
* Externality, in economics, the cost or benefit that affects a party who did not choose to incur that cost or benefit
* Externals, a fictional group of X-Men antagonists
See also
*
*Internal (disambiguation)
Internal may ...
", whereby one economy received rent from other economies.
Definitions
Since the late 1800s, there have been several substantially different conflicting definitions of the term "economic rent" and some of these definitions continue to be used today, often interchangeably causing considerable confusion.
In the late 1800s,
Henry George
Henry George (September 2, 1839 – October 29, 1897) was an American political economist, Social philosophy, social philosopher and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of ...
, best known for his proposal for a
single tax on land, defined rent in the context of land (not economic rent) as "the part of the produce that accrues to the owners of land (or other natural capabilities) by virtue of ownership" and as "the share of wealth given to landowners because they have an exclusive right to the use of those natural capabilities." Other thinkers around the same time conceptualized economic rent as "''incomes analogous to land rents'' in the sense of rewarding control over persistently scarce or monopolised assets, rather than labour or sacrifice." Over time, economists shifted their definition of the term.
Neoclassical economists defined economic rent as "income in excess of opportunity cost or competitive price."
According to
Robert Tollison
Robert D. Tollison (1942–October 24, 2016) was an American economist who specialized in public choice theory.
Education
A native of Spartanburg, South Carolina, Spartanburg, South Carolina, Tollison attended local Wofford College where he earn ...
(1982), economic rents are "excess returns" above the "normal levels" that are generated in competitive markets. More specifically, a rent is "a return in excess of the resource owner's
opportunity cost
In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...
". The law professors
Lucian Bebchuk and
Jesse Fried
Jesse may refer to:
People
* Jesse (biblical figure), father of David in the Bible
* Jesse (given name), including a list of people
* Jesse (surname), a list of people
Music
* ''Jesse'' (album), a 2003 album by Jesse Powell
* "Jesse" (s ...
define the term as "extra returns that firms or individuals obtain due to their positional advantages."
In the mid 1900s,
public choice theorists began using the term "economic rent" to mean specifically the wealth derived from state-granted rights that transfer wealth to the new right holders from others rather than creating new wealth to be split between producer and consumer. The modern term
rent seeking
Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth.
Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effic ...
derives from this definition of economic rent.
Classical rent (land rent)
In political economy, including
physiocracy
Physiocracy (; from the Greek for "government of nature") is an economic theory developed by a group of 18th-century Age of Enlightenment French economists. They believed that the wealth of nations derived solely from the value of "land agricult ...
,
classical economics
Classical economics, also known as the classical school of economics, or classical political economy, is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. It includ ...
,
Georgism
Georgism, in modern times also called Geoism, and known historically as the single tax movement, is an economic ideology holding that people should own the value that they produce themselves, while the economic rent derived from land—includ ...
, and other
schools of economic thought
In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a mutual perspective on the way economies function. While economists do not always fit within particular schools, particularly in ...
, land is recognized as an
inelastic factor of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilised amounts of the various inputs determine the quantity of output according to the rela ...
. Land, in this sense, means exclusive access rights to any natural opportunity. Rent is the share paid to
freeholders for allowing production on the land they control.
David Ricardo
David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, politician, and member of Parliament. He is recognized as one of the most influential classical economists, alongside figures such as Thomas Malthus, Ada ...
is credited with the first clear and comprehensive analysis of differential land rent and the associated economic relationships (
law of rent).
Johann Heinrich von Thünen
Johann Heinrich von Thünen (24 June 1783 – 22 September 1850), sometimes spelled Thuenen, was a prominent nineteenth-century economist and a native of Mecklenburg-Strelitz, now in northern Germany.
Even though he never held a professorial p ...
was influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was density of population, increasing the profitability of commerce and providing for the division and specialization of labor, that commanded higher municipal rents. These high rents determined that land in a central city would not be allocated to farming but be allocated instead to more profitable residential or commercial uses.
Observing that a tax on the unearned
rent of land would not distort economic activities,
Henry George
Henry George (September 2, 1839 – October 29, 1897) was an American political economist, Social philosophy, social philosopher and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of ...
proposed that publicly collected land rents (
land value taxation
A land value tax (LVT) is a levy on the value of land without regard to buildings, personal property and other improvements upon it. Some economists favor LVT, arguing it does not cause economic inefficiency, and helps reduce economic inequali ...
) should be the primary (
or only) source of public revenue, though he also advocated public ownership, taxation, and regulation of
natural monopolies and monopolies of scale that cannot be eliminated by regulation.
Neoclassical Paretian rent
Neoclassical economics
Neoclassical economics is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a go ...
extends the concept of rent to include factors other than natural resource rents.
* "The excess earnings over the amount necessary to keep the factor in its current occupation."
* "The difference between what a factor of production is paid and how much it would need to be paid to remain in its current use."
* "A return over and above opportunity costs, or the normal return necessary to keep a resource in its current use."
[Preview.]
/ref>
The labeling of this version of rent as "Paretian" may be a misnomer in that Vilfredo Pareto
Vilfredo Federico Damaso Pareto (; ; born Wilfried Fritz Pareto; 15 July 1848 – 19 August 1923) was an Italian polymath, whose areas of interest included sociology, civil engineering, economics, political science, and philosophy. He made severa ...
, the economist for whom this kind of rent was named, may or may not have proffered any conceptual formulation of rent.
Monopoly rent
Monopoly rent refers to those economic rents derived from monopolies, which can result from (1) denial of access to an asset or (2) the unique qualities of an asset. Examples of monopoly rent include: rents associated from legally enforced knowledge monopolies
A monopoly (from Greek and ) is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic competition to produce a particular thing, a lack of viable sub ...
derived from intellectual property like patents or copyrights; rents associated with 'de facto' monopolies of companies like Microsoft
Microsoft Corporation is an American multinational corporation and technology company, technology conglomerate headquartered in Redmond, Washington. Founded in 1975, the company became influential in the History of personal computers#The ear ...
and Intel
Intel Corporation is an American multinational corporation and technology company headquartered in Santa Clara, California, and Delaware General Corporation Law, incorporated in Delaware. Intel designs, manufactures, and sells computer compo ...
who control the underlying standards in an industry or product line (e.g. Microsoft Office); rents associated with 'natural monopolies' of public or private utilities (e.g. telephone, electricity, railways, etc.); and rents associated with network effects of platform technologies controlled by companies like Facebook, Google, or Amazon.
An antitrust probe described Google Play
Google Play, also known as the Google Play Store, Play Store, or sometimes the Android Store (and was formerly Android Market), is a digital distribution service operated and developed by Google. It serves as the official app store for certifie ...
and Apple App Store
The App Store is an app marketplace developed and maintained by Apple, for mobile apps on its iOS and iPadOS operating systems. The store allows users to browse and download approved apps developed within Apple's iOS SDK. Apps can be download ...
fees as "monopoly rents".
Labour
The generalization of the concept of rent to include opportunity cost has served to highlight the role of political barriers in creating and privatizing rents. For example, a person seeking to become a member of a medieval guild
A guild ( ) is an association of artisans and merchants who oversee the practice of their craft/trade in a particular territory. The earliest types of guild formed as organizations of tradespeople belonging to a professional association. They so ...
makes a huge investment in training and education, which has limited potential application outside of that guild. In a competitive market, the wages of a member of the guild would be set so that the expected net return on the investment in training would be just enough to justify making the investment. In a sense, the required investment is a natural barrier to entry, discouraging some would-be members from making the necessary investment in training to enter the competitive market for the services of the guild. This is a natural "free market" self-limiting control on the number of guild members and/or the cost of training necessitated by certification. Some of those who would have opted for a particular guild may decide to join a different guild or occupation.
However, a political restriction on the number of people entering into the competitive market for services of the guild has the effect of raising the return on investments in the guild's training, especially for those already practicing, by creating an artificial scarcity of guild members. To the extent that a constraint on entrants to the guild actually increases the returns to guild members as opposed to ensuring competence, then the practice of limiting entrants to the field is a rent-seeking
Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth.
Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effi ...
activity, and the excess return realized by the guild members is economic rent.
The same model explains the high wages in some modern professions that have been able to both obtain legal protection from competition and limit their membership, notably medical doctors
A physician, medical practitioner (British English), medical doctor, or simply doctor is a health professional who practices medicine, which is concerned with promoting, maintaining or restoring health through the study, diagnosis, prognosis a ...
, actuaries
An actuary is a professional with advanced mathematical skills who deals with the measurement and management of risk and uncertainty. These risks can affect both sides of the balance sheet and require asset management, liability management, ...
, and lawyers
A lawyer is a person who is qualified to offer advice about the law, draft legal documents, or represent individuals in legal matters.
The exact nature of a lawyer's work varies depending on the legal jurisdiction and the legal system, as wel ...
. In countries where the creation of new universities
A university () is an educational institution, institution of tertiary education and research which awards academic degrees in several Discipline (academia), academic disciplines. ''University'' is derived from the Latin phrase , which roughly ...
is limited by legal charter, such as the UK, it also applies to professors
Professor (commonly abbreviated as Prof.) is an academic rank at universities and other post-secondary education and research institutions in most countries. Literally, ''professor'' derives from Latin as a 'person who professes'. Professors ...
. It may also apply to careers that are inherently competitive in the sense that there is a fixed number of slots, such as football league positions, music charts, or urban territory for illegal drug selling. These jobs are characterised by the existence of a small number of rich members of the guild, along with a much larger surrounding of poor people competing against each other under very poor conditions as they "pay their dues" to try to join the guild. (Reference: "Freakonomics: Why do drug dealers live with their Moms?").
Terminology relating to rent
; Gross rent: Gross rent refers to the rent paid for the services of land and the capital invested on it. It consists of economic rent, interest on capital invested for improvement of land, and reward for the risk taken by the landlord in investing his or her capital.
; Scarcity rent: Scarcity rent refers to the price paid for the use of homogeneous land when its supply is limited in relation to demand. If all units of land are homogeneous but demand exceeds supply, all land will earn economic rent by virtue of its scarcity.
; Differential rent: Differential rent refers to the rent that arises owing to differences in fertility of land. The surplus that arises due to difference between the marginal and intra-marginal land is the differential rent. It is generally accrued under conditions of extensive land cultivation. The term was first proposed by David Ricardo.
; Contract rent: Contract rent refers to rent that is mutually agreed upon between the landowner and the user. It may be equal to the economic rent of the factor.
; Information rent: Information rent is rent an agent derives from having information not provided to the principal.
See also
* Georgism
Georgism, in modern times also called Geoism, and known historically as the single tax movement, is an economic ideology holding that people should own the value that they produce themselves, while the economic rent derived from land—includ ...
* Ground rent
As a legal term, ground rent specifically refers to regular payments made by a holder of a leasehold property to the freeholder or a superior leaseholder, as required under a lease. In this sense, a ground rent is created when a freehold piece of ...
* Land (economics)
In economics, land comprises all naturally occurring resources as well as geographic land. Examples include particular geographical locations, mineral deposits, forests, fish stocks, atmospheric quality, geostationary orbits, and portions of ...
* List of economics topics
The following outline is provided as an overview of and topical guide to economics. Economics is a branch of science that analyzes the production, distribution, and consumption of goods and services. It aims to explain how economies work and ...
* Quasi-rent
Quasi-rent or Marshallian rent is a temporary economic rent like returns to a supplier/owner. Alfred Marshall was the first to observe quasi-rents.
Quasi-rent differs from pure economic rent in that it is a temporary phenomenon. It can arise from ...
* Rent-seeking
Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth.
Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effi ...
* FIRE economy
A FIRE economy is any economy based primarily on the finance, insurance, and real estate sectors. Finance, insurance, and real estate are United States Census Bureau classifications. Barry Popik describes some early uses as far back as 1982. Sinc ...
(finance, insurance and real estate)
* Rentier state
In current political-science and international-relations theory, a rentier state ( or ) is a state which derives all or a substantial portion of its national revenues from the economic rent paid by foreign individuals, concerns or governments. ...
* Hotelling's rule
Hotelling's rule defines the net price path as a function of time while maximizing economic rent in the time of fully extracting a non-renewable natural resource. The maximum rent is also known as Hotelling rent or scarcity rent and is the maxi ...
* Law of rent
* Schumpeterian rent
Schumpeterian rents are earned by innovators and occur during the period of time between the introduction of an innovation and its successful diffusion. It is expected that successful innovations, in time, will be imitated, but until that occurs, t ...
* Johann Heinrich von Thünen
Johann Heinrich von Thünen (24 June 1783 – 22 September 1850), sometimes spelled Thuenen, was a prominent nineteenth-century economist and a native of Mecklenburg-Strelitz, now in northern Germany.
Even though he never held a professorial p ...
* Differential and absolute ground rent
* Property income
Property income refers to profit or income received by virtue of owning property. The three forms of property income are rent, received from the ownership of natural resources; interest, received by virtue of owning financial assets; and profit, ...
* Unearned income
Unearned income is a term coined by Henry George to refer to income gained through ownership of land and other monopoly. Today the term often refers to income received by virtue of owning property (known as property income), inheritance, pensio ...
References
Further reading
*
:*''See also'':
::*
::*
External links
Definition of economic rent at Economist.com
a series of seminars at Queen Mary University of London.
''Rent-Seeking Network''
Rent-Seeking papers by Behrooz Hassani
{{Microeconomics
Renting
Public choice theory
Scarcity