What is "economic rent"

Rent \Rent\ (r[e^]nt), n. [F. rente, LL. renta, fr. L. reddita, fem. sing. or neut. pl. of redditus, p. p. of reddere to give back, pay. See Render.]

1. Income; revenue. See Catel. [Obs.] ``Catel had they enough and rent.''
   --Chaucer.

   [Bacchus] a waster was and all his rent In wine and bordel he dispent.
   --Gower.

   So bought an annual rent or two, And liv'd, just as you see I do.
   --Pope.

2. Pay; reward; share; toll. [Obs.]

   Death, that taketh of high and low his rent.
   --Chaucer.

3. (Law) A certain periodical profit, whether in money, provisions, chattels, or labor, issuing out of lands and tenements in payment for the use; commonly, a certain pecuniary sum agreed upon between a tenant and his landlord, paid at fixed intervals by the lessee to the lessor, for the use of land or its appendages; as, rent for a farm, a house, a park, etc.

   Note: The term rent is also popularly applied to compensation for the use of certain personal chattels, as a piano, a sewing machine, etc.

4. (Polit. Econ.)

   1. That portion of the produce of the earth paid to the landlord for the use of the ``original and indestructible powers of the soil;'' the excess of the return from a given piece of cultivated land over that from land of equal area at the ``margin of cultivation.'' Called also economic rent, or Ricardian rent. Economic rent is due partly to differences of productivity, but chiefly to advantages of location; it is equivalent to ordinary or commercial rent less interest on improvements, and nearly equivalent to ground rent.

   2. Loosely, a return or profit from a differential advantage for production, as in case of income or earnings due to rare natural gifts creating a natural monopoly.

      Black rent. See Blackmail, 3.

      Forehand rent, rent which is paid in advance; foregift.

      Rent arrear, rent in arrears; unpaid rent.
      --Blackstone.

      Rent charge (Law), a rent reserved on a conveyance of land in fee simple, or granted out of lands by deed; -- so called because, by a covenant or clause in the deed of conveyance, the land is charged with a distress for the payment of it.
      --Bouvier.

      Rent roll, a list or account of rents or income; a rental.

      Rent seck (Law), a rent reserved by deed, but without any clause of distress; barren rent. A power of distress was made incident to rent seck by Statute 4 George II. c. 28.

      Rent service (Eng. Law), rent reserved out of land held by fealty or other corporeal service; -- so called from such service being incident to it.

      White rent, a quitrent when paid in silver; -- opposed to black rent.

n. (context economics English) the amount of recompense paid to a factor of production on top of its transfer earnings; this does not encompass costs incurred during the process of production or service

n. the return derived from cultivated land in excess of that derived from the poorest land cultivated under similar conditions [syn: rent]

In economics, economic rent is any payment to a factor of production in excess of the cost 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) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In neoclassical economics, economic rent also includes income gained by beneficiaries of other contrived exclusivity, such as labor guilds and unofficial corruption.

Economic rent should not be confused with producer surplus, or normal profit, both of which involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent should be viewed as unearned revenue, whereas economic profit is a narrower term describing surplus income greater than the next best risk-adjusted alternative. Unlike economic profit, economic rent cannot be eliminated by competition, since all value from natural resources and locations yields economic rent.

In regard to labor, economic rent can be created by the existence of guilds or labor unions (e.g., higher pay for workers, where political action creates a scarcity of such workers). For a produced commodity, economic rent may also be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient). For occupational licensing, it is the cost of permits and licenses that are politically controlled as to their number, regardless of the competence and willingness of those who wish to compete in the area being licensed. For most other production, including agriculture and extraction, economic rent is due to a scarcity 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, if there is no exclusivity and there is perfect competition, there are no economic rents, as competition drives prices down to their floor.

Economic rent is different from other unearned and passive income, including contract rent. This distinction has important implications for public revenue and tax policy. As long as there is sufficient accounting profit, governments can collect a portion of economic rent for the purpose of public finance. For example, economic rent can be collected by a government as royalties or extraction fees in the case of resources 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", whereby one economy received rent from other economies.