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What is Economic Rent?

A simple example of economic rent is when a person is hired at a job for $50,000 a year when she would have accepted $40,000.
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  • Written By: John Lister
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  • Last Modified Date: 07 September 2014
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Economic rent is any excess payment for a service, good, or property above and beyond the minimum amount at which the person receiving payment would still have agreed to the deal. Although the term originated in terms of land, it can apply to any good, service or property which can be hired. It is both an indicator of market imperfections and a guide to the effects of taxation.

One example of economic rent would be an employee who is hired for $50,000 US Dollars (USD) but would have still taken the job at $40,000 USD. In this situation, the excess payment is $10,000 USD. The figure can also be referred to as unearned income. Although, in this example, the employee does work for the money, the extra $10,000 USD is said to be "unearned" because it is above and beyond the value the employee placed on his or her labor when deciding he or she would have done the work for less.

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The term refers to rent, since it was first developed to solve an apparent problem with determining the flow of money in the production process. At most processes that bring together raw materials, labor, and manufacturing equipment costs, the numbers added up in line with the value each step added to the process. Two stores selling the same final product, however, might pay very different rents on identical properties if one was in a better location for attracting customers. In this case, the landowner of the property with the higher rent is able to get extra income thanks to circumstances beyond his direct responsibility or control, such as other shops in the same area creating a busy location for shoppers. This income is explained as economic rent.

In theory, the free market would eliminate this additional money. In the example of the employee, the higher salary should mean more people would be attracted to working for the firm, dropping the salary down until people are working for the lowest amount they would accept. In reality, this might not happen, as there may not be enough people with the necessary skills to fill the posts, or those with the skills may be unwilling to relocate. Such issues are known as market barriers. The extent of economic rent may indicate how strong those barriers are.

Economic rent can also be a guide to taxation. In theory, the government could tax the employee in the above example and take some or even all of their income above $40,000 USD without affecting their willingness to continue working in the job. In reality, the added tax may cause resentment and thus political repercussions.

Some economists use the term in the everyday meaning of rent: the flat amount of money paid in return for use of land or property, regardless of any other factors. This runs the risk of confusion, and it is best for people to avoid using the phrase for this meaning if this is a concern. Fortunately, the context usually makes it clear enough which definition is being used.

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Crispety
Post 5

Latte31-This can also relate to the real estate market.

Years ago during the real estate boom people were willing to pay double what the current market price of these homes was. Often the sales were made for above market pricing because there was so much competition.

The difference between the price paid and the actual market value is also economic rent. The same could be said in current times with the depressed values. A seller might take less than the asking price because they really need to sell the home.

If the buyer offers a much lower offer than the list price and the seller accepts the difference between the price that the buyer could have paid and the price that the seller accepted is the economic rent.

The buyer would have paid more, but the seller was so eager that he took less money in order to sell the home.

latte31
Post 4

Subway11-I remember those days. I think that this relates very much to the concept of economic elasticity. The gas prices are a perfect example.

When the price of gasoline rises too rapidly, consumers choose an alternative to buying more gasoline. They carpool, ride bike, or take public transportation.

Many buy fuel efficient smaller cars in order to reduce consumption. As a result of the reduced demand for gas, eventually the prices begin to come down.

Economic goods follow the same pattern because when an item is priced artificially low in order to entice consumers to buy at the store, the item will surely sell out. However, if the item is priced too high people will not buy it unless it is a necessity and even then they will limit their consumption.

Some items go on sale and we buy more of them due to the lower price, but we probably would have bought it at the regular price as well. For example, I normally buy Vitatops which is a nutrient rich muffin top that is high in fiber. Normally a box of four costs about $5.00. I buy these religiously at the $5.00 price.

However, sometimes the supermarket will have this on sale for buy one get free essentially half price. I probably purchase more than normal but here the economic rent is $2.50 per box.

subway11
Post 3

Comfyshoes- Many new college graduates have trouble finding work and often resort to accepting low paying jobs. For example, a college graduate with a Bachelor’s in business gets a job as an administrative assistant at a company and earns about $24,000 a year.

By contrast a traditional salary in normal economic times would yield the person a much higher salary of at least $40,000 a year or more.

Also in periods of low unemployment where jobs are plentiful employers offer a higher wage than they normally would in order to attract the right personnel.

During the technology and dot.com boom of the nineties many applicants with experience in the information technology sector were earning money hand over fist.

Some of these applicants would have worked for less due to their limited knowledge, but because the demand was so high they were offered premium salaries to ensure that they would work for the company. This could be seen in studies of the economic rent graphs of the time.

comfyshoes
Post 2

DentalFloss-I have heard of actors making a lot more money by being paid a percentage of the profits of the movie.

Economics today really lend itself to the idea of pure economic rent. At no other time since the Great Depression have we faced such dire economic times. With the national unemployment at 10% many employers are now benefiting by receiving candidates that are overqualified for the positions but have no other job prospects.

Since there is such a shortage of jobs and an abundance of people looking for them, many people are now working for wages and salaries that they would not have considered a few years ago.

DentalFloss
Post 1

A lot of performers get paid on the terms of something similar to economic rent. Film actors, for example, are given a contract promising a certain amount, often followed by a percentage of the total profits. Many musicians are offered the same sort of contract when they make a studio album.

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