In economics, economic rent is any payment to an owner or factor of production 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) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In the moral economy of neoclassical economics, economic rent includes income gained by labor or state beneficiaries of other "contrived" (assuming the market is natural, and does not come about by state and social contrivance) exclusivity, such as labor guilds and unofficial corruption.
In the moral economy of the economics tradition broadly, economic rent is opposed to producer surplus, or normal profit, both of which are theorized to involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, 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 (earned) plus economic rent (unearned).
For a produced commodity, economic rent may be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient). For education and occupational licensing, 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 of such workers, as opposed to an ideal condition where labor competes with other factors of production on price alone). For most other production, 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.
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.
According to Robert Tollison (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".
Henry George, best known for his proposal for a single tax on land, defines 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."
In simple terms, economic rent is an excess where there is no enterprise or costs of production.
In political economy, including physiocracy, classical economics, Georgism, and other schools of economic thought, land is recognized as an inelastic factor of production. 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.
As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ....
Johann Heinrich von Thünen 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 proposed that publicly collected land rents (land value taxation) 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 economics extends the concept of rent to include factors other than natural resource rents.
The labeling of this version of rent as "Paretian" may be a misnomer in that Vilfredo Pareto, the economist for whom this kind of rent was named, may or may not have proffered any conceptual formulation of 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 derived from intellectual property like patents or copyrights; rents associated with 'de facto' monopolies of companies like Microsoft and Intel 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.
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 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 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, actuaries, and lawyers. In countries where the creation of new universities is limited by legal charter, such as the UK, it also applies to 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?").
Santa Monica's residents were being afforded too many choices... a population of 84,000 was served by 454 licensed taxis... City experts settled on a franchise system: Competition would be limited to five cab companies. The total number of taxis would be fixed at around 200. The biggest losers, besides the Santa Monica residents who had a tougher time finding a taxi, were the single proprietors who'd bought taxis and earned their livings in the city only to be told that they were no longer welcome there.
In economics, abnormal profit, also called excess profit, supernormal profit or pure profit, is "profit of a firm over and above what provides its owners with a normal (market equilibrium) return to capital." Normal profit (return) in turn is defined as opportunity cost of the owner's resources. A related broader term is economic rent, which applies to the owner of a resource, such as land, rather than to the firm as such.According to the theoretical model of perfect competition, abnormal profits are unsustainable because they stimulate new supply, which forces down prices and eliminates the abnormal profit. Abnormal profit persists in the long run in imperfectly competitive markets where firms successfully block the entry of new firms. Abnormal profit is usually generated by an oligopoly or a monopoly; however, firms often try to hide this fact, both from the market and government, in order to reduce the chance of competition, or government intervention in the form of an antitrust investigation.In principle, there are three kinds of abnormal profit:
Intramarginal rent.Business writer Michael Porter and Anita M. McGahan undertook an empirical study of the "emergence and sustainability of abnormal profits" in 2003, in which they concluded that both industry structure and firm performance were determinants of whether abnormal profits could be sustained by firms.Economic humanitarianism (Raëlianism)
Economic humanitarianism is a collection of economic ideas which according to its creator Raël is designed to complement Geniocracy.Geolibertarianism
Geolibertarianism is a political and economic ideology that integrates libertarianism with Georgism (alternatively geoism or geonomics), most often associated with left-libertarianism or the radical center.Geolibertarians hold that geographical space and raw natural resources—any assets that qualify as land by economic definition—are rivalrous goods to be considered common property or more accurately unowned, which all individuals share an equal human right to access, not capital wealth to be privatized fully and absolutely. Therefore, landholders must pay compensation according to the rental value decided by the free market, absent any improvements, to the community for the civil right of usufruct (that is, legally recognized exclusive possession with restrictions on property abuse) or otherwise fee simple title with no such restrictions. Ideally, the taxing of a site would be administered only after it has been determined that the privately captured economic rent from the land exceeds the title-holder's equal share of total land value in the jurisdiction. On this proposal, rent is collected not for the mere occupancy or use of land as neither the community nor the state rightfully owns the commons, but rather as an objectively assessed indemnity due for the legal right to exclude others from that land. Some geolibertarians also support Pigovian taxes on pollution and severance taxes to regulate natural resource depletion and compensatory fees with ancillary positive environmental effects on activities which negatively impact land values. They endorse the standard right-libertarian view that each individual is naturally entitled to the fruits of their labor as exclusive private property as opposed to produced goods being owned collectively by society or by the government acting to represent society, and that a person's "labor, wages, and the products of labor" should not be taxed. Along with non-Georgists in the libertarian movement, they also support law of equal liberty, advocating "full civil liberties, with no crimes unless there are victims who have been invaded".Geolibertarians are generally influenced by the Georgist single tax movement of the late-19th and early-20th centuries, but the ideas behind it pre-date Henry George and can be found in different forms in the writings of John Locke, the English True Levellers or Diggers such as Gerrard Winstanley, the French Physiocrats (particularly Quesnay and Turgot), Adam Smith, David Ricardo, Jean-Baptiste Say, Frédéric Bastiat, Thomas Jefferson, Thomas Paine, Lysander Spooner, Benjamin Tucker, John Stuart Mill, Herbert Spencer and Thomas Spence. Prominent geolibertarians since George have included Albert Jay Nock, Frank Chodorov and Milton Friedman (on consequentialist grounds). Other libertarians who have expressed support for the land value tax as an incremental reform include John Hospers, Karl Hess and United States Libertarian Party co-founder David Nolan.Georgism
Georgism, also called geoism and single tax (archaic), is an economic ideology holding that, while people should own the value they produce themselves, economic value derived from land (often including natural resources and natural opportunities) should belong equally to all members of society. Developed from the writings of the economist and social reformer Henry George, the Georgist paradigm seeks solutions to social and ecological problems, based on principles of land rights and public finance which attempt to integrate economic efficiency with social justice.Georgism is concerned with the distribution of economic rent caused by natural monopolies, pollution, and the control of commons, including title of ownership for natural resources and other contrived privileges (e.g., intellectual property). Any natural resource which is inherently limited in supply can generate economic rent, but the classical and most significant example of 'land monopoly' involves the extraction of common ground rent from valuable urban locations. Georgists argue that taxing economic rent is efficient, fair, and equitable. The main Georgist policy recommendation is a tax assessed on land value. Georgists argue that revenues from a land value tax (LVT) can be used to reduce or eliminate existing taxes (for example, on income, trade, or purchases) that are unfair and inefficient. Some Georgists also advocate for the return of surplus public revenue to the people by means of a basic income or citizen's dividend.
Economists since Adam Smith and David Ricardo have observed that, unlike other taxes, a public levy on land value does not cause economic inefficiency. A land value tax also has progressive tax effects, in that it is paid primarily by the wealthy (the landowners), and it cannot be passed on to tenants, workers, or users of land. Advocates of land value taxes argue that they would reduce economic inequality, increase economic efficiency, remove incentives to under-utilize urban land, and reduce property speculation. The philosophical basis of Georgism dates back to several early thinkers such as John Locke, Baruch Spinoza, and Thomas Paine, but the concept of gaining public revenues mainly from land and natural resource privileges was widely popularized by Henry George and his first book, Progress and Poverty (1879).
Georgist ideas were popular and influential during the late 19th and early 20th century. Political parties, institutions and communities were founded based on Georgist principles during that time. Early devotees of Henry George's economic philosophy were often termed Single Taxers for their political goal of raising public revenue mainly from a land value tax, although Georgists endorsed multiple forms of rent capture (e.g., seigniorage) as legitimate. The term Georgism was invented later, and some prefer the term geoism to distinguish their beliefs from those of Henry George.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 is sold on a long lease or leases. The ground rent provides an income for the landowner. In economics, ground rent is a form of economic rent meaning all value accruing to titleholders as a result of the exclusive ownership of title privilege to location.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 maximum rent that could be obtained while emptying the stock resource. In an efficient exploitation of a non-renewable and non-augmentable resource, the percentage change in net-price per unit of time should equal the discount rate in order to maximise the present value of the resource capital over the extraction period.
This concept was the result of analysis of non-renewable resource management by Harold Hotelling, published in the Journal of Political Economy in 1931. Devarajan and Fisher note that a similar result was published by L. C. Gray in 1914, considering the case of a single mine owner.
The simple rule can be expressed by the equilibrium situation representing the optimal solution.
when P(t) is the unit profit at time t and δ is the discount rate.
The economic rent obtained is an abnormal rent, often referred to as resource rent, since it generates from a situation where the resource owner has open access to the resource for free. In other words, the resource rent is the resource royalty or resource's net price (price received from selling the resource minus costs. In this case costs are zero). The resource rent therefore equals the shadow value of the natural resource or natural capital.
The concept of resource rent also includes biological and other renewable resources.Land value tax
A land/location value tax (LVT), also called a site valuation tax, split rate tax, or site-value rating, is an ad valorem levy on the unimproved value of land. Unlike property taxes, it disregards the value of buildings, personal property and other improvements to real estate. A land value tax is generally favored by economists as (unlike other taxes) it does not cause economic inefficiency, and it tends to reduce inequality.Land value tax has been referred to as "the perfect tax" and the economic efficiency of a land value tax has been known since the eighteenth century. Many economists since Adam Smith and David Ricardo have advocated this tax, but it is most famously associated with Henry George, who argued that because the supply of land is fixed and its location value is created by communities and public works, the economic rent of land is the most logical source of public revenue.A land value tax is a progressive tax, in that the tax burden falls on titleholders in proportion to the value of locations, the ownership of which is highly correlated with overall wealth and income. Land value taxation is currently implemented throughout Denmark, Estonia, Lithuania, Russia,, Singapore, and Taiwan; it has also been applied to smaller extents in subregions of Australia, Mexico (Mexicali), and the United States (e.g., Pennsylvania).Land value tax in the United States
Land value taxation (i.e. property tax applied only to the unimproved value of land) has a long history in the United States dating back from Physiocrat influence on Thomas Jefferson and Benjamin Franklin. It is most famously associated with Henry George and his book Progress and Poverty (1879), which argued that because the supply of land is fixed and its location value is created by communities and public works, the economic rent of land is the most logical source of public revenue. and which had considerable impact on turn-of-the-century reform movements in America and elsewhere. Every single state in the United States has some form of property tax on real estate and hence, in part, a tax on land value. However, Pennsylvania in particular has seen local attempts to rely more heavily on the taxation of land value.Law of rent
The law of rent was formulated by David Ricardo around 1809, and presented in its most developed form in his magnum opus, On the Principles of Political Economy and Taxation. This is the origin of the term Ricardian rent. Ricardo's formulation of the law was the first clear exposition of the source and magnitude of rent, and is among the most important and firmly established principles of economics.John Stuart Mill called it the "pons asinorum" of economics.Patrick Edward Dove
Patrick Edward Dove (31 July 1815 – 28 April 1873) was born at Lasswade, near Edinburgh in Scotland. He is mainly remembered for his book The Theory of Human Progression of 1850 which sets out his philosophy that land should be in common ownership, with the economic rent on the land taking the place of other taxes, an idea generally known as Georgism.Progress and Poverty
Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy is an 1879 book by social theorist and economist Henry George. It is a treatise on the questions of why poverty accompanies economic and technological progress and why economies exhibit a tendency toward cyclical boom and bust. George uses history and deductive logic to argue for a radical solution focusing on the capture of economic rent from natural resource and land titles.
Progress and Poverty is George's first book, which sold several million copies, exceeding all other books except the Bible during the 1890s. It helped spark the Progressive Era and a worldwide social reform movement around an ideology now known as 'Georgism'. Jacob Riis, for example, explicitly marks the beginning of the Progressive Era awakening as 1879 because of the date of this publication. The Princeton historian Eric F. Goldman wrote this about the influence of Progress and Poverty: For some years prior to 1952 I was working on a history of American reform and over and over again my research ran into this fact: an enormous number of men and women, strikingly different people, men and women who were to lead 20th century America in a dozen fields of humane activity, wrote or told someone that their whole thinking had been redirected by reading Progress and Poverty in their formative years. In this respect no other book came anywhere near comparable influence.
Progress and Poverty had perhaps even a larger impact around the world, in places such as Denmark, the United Kingdom, Australia, and New Zealand, where George's influence was enormous. Contemporary sources and historians claim that in the United Kingdom, a vast majority of both socialist and classical liberal activists could trace their ideological development to Henry George. George's popularity was more than a passing phase; even by 1906, a survey of British parliamentarians revealed that the American author's writing was more popular than Walter Scott, John Stuart Mill, and William Shakespeare. In 1933, John Dewey estimated that Progress and Poverty "had a wider distribution than almost all other books on political economy put together."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 the barriers to entry that potential competitors face in the short run, such as the granting of patents or other legal protections for intellectual property by governments. It can also arise due to entrepreneurial address of market fluctuation, or it can arise due to the lack of real capital to meet near term demand increases. In the longer term the opportunity to profit will bring new capital into existence and the quasi rent will be competed away.In Industrial Organizations field, Williamson points "The joining of opportunism with transaction-specific investments (or what Klein, Crawford, and Alchian refer to as "appropriable quasi rents") is a leading factor in explaining decisions to vertically integrate."Quasi-rent refers to that additional income which is similar to rent. According to Ricardo, rent arises on account of fixed supply of land. But there are other factors which are found in fixed supply in the short term. The additional income earned by these factors in the short-period is similar to rent.Rack-rent
Rack-rent denotes two different concepts:
an excessive rent.
the full rent of a property, including both land and improvements if it were subject to an immediate open-market rental review.The second definition is equivalent to the economic rent of the land plus interest on capital improvements plus depreciation and maintenance—the normal market rent of a property—and is not inherently excessive. Also, this may be different from the rent actually being received.
Historically, however, rack-rent has often been a term of protest used to denote an unjustly excessive rent (the word "rack" evoking the medieval torture device), usually one paid by a tenant farmer. The two conceptions of rack-rent both apply when excessive rent is obtained by threat of eviction resulting in uncompensated dispossession of improvements the tenant himself has made. I.e., by charging rack-rent, the landowner unjustly uses his power over the land to effectively confiscate wages, in addition to merely charging the tenant interest and depreciation on the capital improvements which the landlord himself has made to the land.When there is no accessible rent-free land, any improvements in the condition of society, be they in the form of civilizational progress or local improvement, are recaptured in the form of higher land values, and the leftover wages after rent is paid will tend towards subsistence, as described by David Ricardo's Law of Rent. Such rents can be described as rack-rent, and this sense of the term is economically meaningful, and distinct from other forms of rent.
In Ulster in the 1700s, "... landlords were able to 'auction off' leases to the highest bidders. That practice, known as 'rack renting', forced renters to bid more than they could afford to pay."Rental value
Rental value is the fair market value of property while rented out in a lease. More generally, it may be the consideration paid under the lease for the right to occupy, or the royalties or return received by a lessor (landlord) under a license to real property. In the science and art of appraisal, it is the amount that would be paid for rental of similar real property in the same condition and in the same area.Determining Rental RatesDeciding on a rental rate doesn’t just mean figuring out the highest possible price you could list your rental for. Increasing the rental rate to the top of the market, can also increase the number of calls or issues a tenant may complain about during the term of the lease.
e.g. If you’re paying top dollar for something, you expect an exceptional experience. If you pay a below market rent, you are likely to not complain about smaller issues since you’re paying less.
Pricing your rental should be a strategy in order to maximize your net income. The longer you own the property, the easier this becomes.Resource rent
In economics, rent is a surplus value after all costs and normal returns have been accounted for, i.e. the difference between the price at which an output from a resource can be sold and its respective extraction and production costs, including normal return. This concept is usually termed economic rent but when referring to rent in natural resources such as coastal space or minerals, it is commonly called resource rent. It can also be conceptualised as abnormal or supernormal profit.
In practice, identifying and measuring (or collecting) resource rent is not straightforward. At any point in time, rent depends on the availability of information, market conditions, technology and the system of property rights used to govern access to and management of resources.Ricardian economics
Ricardian economics are the economic theories of David Ricardo, an English political economist born in 1772 who made a fortune as a stockbroker and loan broker. At the age of 27, he read An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith and was energized by the theories of economics.
His main economic ideas are contained in On the Principles of Political Economy and Taxation (1817). This set out a series of theories which would later become theoretical underpinnings of both Marx's Das Kapital and Marshallian economics, including the theory of economic rent, the labour theory of value and above all the theory of comparative advantage.
Ricardo wrote his first economic article ten years after reading Adam Smith and ultimately, the "bullion controversy" gave him fame in the economic community for his theory on inflation in 19th-century England. This theory became known as monetarism, the theory that excess currency leads to inflation. He also played a part in the emergence of classical economics, which meant he fought for free trade and free competition without government interference by enforcing laws or restrictions.Richard Jones (economist)
Richard Jones (1790, in Tunbridge Wells – 20 January 1855, in Hertford Heath) was an English economist who criticised the theoretical views of David Ricardo and T. R. Malthus on economic rent and population.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, the innovator will earn Schumpeterian rents. They were named after economist Joseph Schumpeter, who saw profits made by businesses as resulting from the development of new processes which disturb economic equilibrium, temporarily raising revenues above their resource costs. This type of profit is also called entrepreneurial rent.Schumpeterian rent is seen as a form of economic rent, although Schumpeterian rent may be seen as an incentive towards greater economic efficiency.