Rents, Economic

Rents have a specific meaning in economic theory. They are equal to any excess payment made to a resource over and above the amount necessary to keep that resource under current employment. This necessary amount is equal to the opportunity cost of the resource; that is, the payment it could receive in its most desired alternative employment. Consider, for example, a famous movie actor who receives a very high salary due to the large revenues generated for movie producers. Of course, if the film industry did not exist, this actor would not be famous and could not, therefore, generate such large revenues. As such, the salary he or she could secure as an actor would be a lot less. The amount he or she would accept to remain an actor is the salary floor on which any excess payment is considered an economic rent. It is obvious, then, that actors earning multimillions of dollars per year are earning a salary that is mostly economic rent. And this rent is paid to them because of their fame that arises from a unique talent that is suited to their current occupation.

The concept of economic rent was originally applied by 18th-century economists, notably David Ricardo, to the agriculture sector. If land is homogeneous and in abundance, it has an opportunity cost of zero; that is, it will either be gainfully used or remain idle and intact. Thus, any payments made to landowners for the use of their land become economic rent in their entirety; in fact, economists refer to it as Ricardian rent. If the land is limited in availability, then any payment above its most gainful use would be the economic rent in that case. But suppose, on the other hand, that land is made up of tracts of different qualities within a market area. Each tract is, therefore, usable for the different activities which are best suited to the qualities concerned. Since the opportunity cost of each tract is different, if a single price were paid to use any of these tracts for some common activity, it would result in what are known as differential rents.

What a tract of land and a famous movie actor have in common is that they both remain available in the long run to be employed in a fashion commensurate with their potential. Their availability for use is independent of any payment offered which is above their opportunity cost. Sometimes, however, rents could be limited to the short run only. In this case they are known as quasi rents (a term first used by the 19thcentury economist Alfred Marshall). Quasi rents occur when an economic profit is earned on a resource or activity whose supply is fixed in the short run. In the long run these quasi rents disappear. As an example, consider a business that uses a patented technology and, as such, produces a unique product. This patent gives the business a monopoly situation whereby it can set a price above the economic cost of production so as to earn a profit equal to the quasi rent. When the patent expires, and other businesses are allowed to use the technology, these quasi rents will disappear as the business now faces competition. Unless the producer benefits from long-run barriers to entry, such as economies of scale, its monopoly rents can be competed away by new entrants to the market.

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