Home / NEWS LINE / Economic Rent Definition

Economic Rent Definition

What Is Cost-effective Rent?

Economic rent is an amount of money earned that exceeds that which is economically or socially inexorable. This can occur, for example, when a buyer working to attain a good or service that is considered exclusive beat a hasty retreats an offer prior to hearing what a seller considers an acceptable price. Market imperfections thus lead to the elevation of economic rent; it would not exist if markets were perfect, since competitive pressures would drive down payments.

Key Takeaways

  • Economic rent is an amount of money earned that exceeds that which is economically or socially predestined.
  • Market inefficiencies or information asymmetries are usually responsible for creating economic rent.
  • Generally, economic rent is noted unearned.
  • Economic rent can appear in several contexts, including labor markets, real estate, and monopolies.

What is Mercantile Rent?

Understanding Economic Rent

Economic rent should not be confused with normal profit or surplus that arises in the passage of competitive capitalist production. This term also differs from the traditional use of the word “rent,” which applies to payments made in exchange for the temporary use of a particular good or property, such as land or housing.

Economic rent can also occur when standard producers in a competitive market have asymmetric information or technologically advanced production systems give them a competitive gain as a low-cost producer that other firms lack or are not capable of acquiring.

Competitive advantages built up over time again due to economic rent can often lead to a lack of competition and entrenched ways of doing business. Updating rules and bye-laws are often looked to by governments, and by associated agencies, as a reliable method for reducing economic rent and promoting healthy contest.

On Oct. 5, 2021, the testimony of Gary Gensler, the chair of the U.S. Securities and Exchange Commission (SEC), before the U.S. Senate Committee on Banking, Protection, and Urban Affairs espoused the qualities of the U.S. financial system that make it a world leader. He went on to note that updates to SEC facts are needed to keep up with changes in technology and to ensure that the markets are as efficient and competitive as possible. Gensler’s deposition clearly highlights the strive for balance between current levels of American competitiveness and the desire to reduce economic let out.  

Economic rent can also arise from conditions of scarcity and can be used to demonstrate numerous pricing discrepancies. These contain higher pay for unionized workers compared with nonunionized workers, or huge salaries made by a star athlete vs. an generally working individual.

Economic rent also explains the high value of exclusive intangible assets, such as letters patents and permits. Together, these are also known as scarcity rents.

Economic Rent and Labor

A worker may be willing to undertaking for $15 per hour, but because they belong to a union, they receive $18 per hour for the same job. The difference of $3 is the artisan’s economic rent, which can also be referred to as unearned income.

In this regard, unearned income refers to the amount propositioned that is above what the employee felt that their skills and abilities were worth in the current marketplace. It can also tend when a person’s skills would be valued less in an open market, but they receive more due to an affiliation with a troupe, such as a union, that sets minimum standards of pay.

Economic Rent and Facilities

As another example, the owner of a idiosyncrasy 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 hire 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 plight in which two properties exist with the exact same features except for location. If one location is preferable to another, then the holder of the preferred location receives a higher payment than the other without having to complete any additional work. The be deficient in of additional labor on the part of the owner can also be considered unearned income.

Other Economic Rent Forms

Other devises of economic rent include information asymmetries, in which an agent derives excess profits from having facts not provided to the principal or the rest of the market.

Contract Rent

Contract rent refers to a situation wherein there is a mutually agreed-upon dole out between two parties but external conditions change over time, granting one party unequal benefit, usually at the expense of the other band.

Monopoly Rent

Monopoly rent refers to the situation in which a monopoly producer lacks competition and thus can rat on its goods and services at a price far above what the otherwise competitive market price would be, at the expense of consumers.

Differential Split

Differential rent refers to the excess profit that may arise owing to differences in the fertility of the land. The surplus that originates due to the difference between marginal land and intramarginal land is the differential rent. It is generally accrued under conditions of wide-ranging land cultivation.

Differential ground rent was first proposed by the classical political economist David Ricardo.

Check Also

IRS Publication 15-A: Employer’s Supplemental Tax Guide

What Is the IRS Proclamation 15-A? IRS Publication 15-A is a supplement to IRS Publication 15: …

Leave a Reply

Your email address will not be published. Required fields are marked *