Economic rent
In economic theory, economic rent is a payment to a factor of production in excess of that which is needed to keep it employed in its current use.
In classical economics, "rent" referred to a specific kind of income received by the owners of land and other gifts of nature (natural resources) and was thus often called "land rent." To Karl Marx and Henry George, this land-rent was seen as a form of exploitation. Modern neoclassical economics has generalized this theory to suggest that the owner of any kind of input can receive economic rent due to unique qualities of that input.
Two types of factor rent
- Classical factor rent - This is the return to a factor above and beyond the amount necessary to induce the supplier to offer the factor to the market. This corresponds to the notion of a producers' surplus or "scarcity rent." This type of economic rent arises because of scarcity in the supply of factors. If factor supply is perfectly elastic, there would be no producers' surplus and no economic rents. If, for example, you love your job as an NHL hockey player, you might be prepared to offer your services for a wage much lower than the millions that you are receiving.
- Paretian factor rent - This is the return to a factor above and beyond the amount that the factor supplier would receive in its next-best alternative use. This type of economic rent draws on the notion of opportunity costs. For example, if someone is earning $20,000 for a job, and the next best job pays $15,000, then the economic rent is the difference between the two of $5,000.
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