Economic Rent

Published Mar 24, 2023

Definition of Economic Rent

Economic rent is defined as the income earned above the necessary costs of production or of entering into a contractual agreement. Simply put, it is the difference between what someone is paid and what they need to be paid to do a particular job or provide a specific service. That means it describes the income beyond what is necessary to keep a resource in its current use, and it is often associated with monopolies or unique, valuable resources.

Example

An example of economic rent can be seen in the housing market. In certain areas, there is a great demand for apartments, but the supply is limited. A landlord with a building in that area can charge a high rent because of this restricted supply. The difference between the market rent and the cost of production and maintenance of the building is the economic rent that the landlord earns.

Similarly, professional athletes and entertainers can earn economic rent due to their unique talents and abilities. For example, a top-tier quarterback in football can earn significantly more than average because of their specific skill set that is valued in the market.

Why Economic Rent Matters

Economic rent is often associated with market inefficiencies or monopolies, and it can lead to the concentration of wealth and power. It is important to understand how and why economic rent emerges because it can have significant economic and social consequences. Policymakers and regulators must be aware of economic rent in different markets to ensure greater fairness and equality in our society.