Economic Rent

What is Economic Rent?

Also known as scarcity rent, economic rent is the earned money amount that is more than the social or economic necessity. For instance, when somebody works hard to purchase an exclusive product makes an offer before hearing what the seller regards as an acceptable price.

Generally, Market imperfections lead to an increase in economic rents. Such rents would not exist if the market was perfect as the competitiveness would decrease prices.

Explaining Economic Rent

Most of the times, economic rents are confused with surpluses or profits that arise during a competitive capitalist production. However, these two are completely different concepts. Furthermore, this term is also different from the traditional meaning of “rent”.

As mentioned above, economic rent can also occur because of asymmetric information in the market or a specific firm using technological advancement; thus, gaining a competitive advantage. For instance, suppose a wheat farmer got free and unlimited access to water supply while others are still struggling for this resource, the farmer would be able to get economic rent by selling his products at a certain price.

Moreover, economic rent can also occur from a condition of scarcity and can easily be used to display several price discrepancies. This may include a huge amount of money made by a famous athlete in comparison to the ones who are not at that stature yet.

And then, economic rent also describes the high value of limited intangible assets, like permits and patents.

Suppose there is a worker who is willing to work for Rs. 150 per hour. However, because he is associated with a union, he gets Rs. 180 per hour for the same job. This difference of Rs. 30 will be the economic rent of the worker, which can also be regarded as the unearned Income.

In this aspect, unearned income is the amount that is offered above what the employee would feel that his skills and abilities are worthy of in the current marketplace. It can also be applied when the skills of a person are valued less in the Open Market; however, he is receiving more because of an affiliation with a specific group, which helps set up the minimum standard of payment.