Economic Rent

8 Key excerpts on "Economic Rent"

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  Microeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Economic Rent is, as the saying goes, “pure gravy.” In LeBron’s case, Economic Rent was $64.5 million in 2015. Economic Rent is producer surplus earned by resource suppliers. The division of earnings between opportunity cost and Economic Rent depends on the resource owner’s elasticity of supply. In general, the less elastic the resource supply, the greater the Economic Rent as a proportion of total earnings. To develop a feel for the difference between opportunity cost and Economic Rent, let’s consider three resource markets. 11-4a Market A: All Earnings are Economic Rent If the supply of a resource to a particular market is perfectly inelastic, that resource has no alternative use. Thus, there is no opportunity cost, and all earnings are eco-nomic rent. For example, scrubland in the high plains of Montana has no use other than for grazing cattle. The supply of this land is depicted by the red vertical line in panel (a) of Exhibit 3, which indicates that the 10 million acres have no alternative use. Because supply is fixed, the rent paid to graze cattle on this land has no effect on the quantity of land supplied for cattle grazing. The land’s opportunity cost is zero, so all earnings are Economic Rent, shown by the blue-shaded area. Here, fixed sup-ply determines the equilibrium quantity of the resource, but demand determines the equilibrium price. 11-4b Market B: All Earnings are Opportunity Cost At the other extreme is the market in which a resource can earn as much in its best alter-native use as in its present use. This situation is illustrated by the perfectly elastic supply curve in panel (b) of Exhibit 3, which shows the market for janitors in the local school system. Here, janitors earn $15 an hour and supply 1,000 hours of labor per day. If the school system paid less than $15 per hour, janitors could find jobs elsewhere, perhaps in nearby factories, where the wage is $15 per hour.

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  Research on Efficiency and Fairness of Resources Allocationby China's Governmental Administration

  • Hong Sheng, Pu Qian(Authors)
  • 2019(Publication Date)
  • WSPC

    (Publisher)

  Figure 3.1 ). Absolute rent is the difference between having and not having the factor of production. Economic Rent is the difference between a value produced by one factor of production and the cost needed to bring that factor into production. This is equivalent to absolute rent.

  Figure 3.1.Diagram of land rent.

  Note: Q1 is the quantity of maximum supply of resources.

  People will soon discover that it is possible to create rent through means of human will. For instance, monopoly created by technological innovation can create rent through controlling the quantity of production or through pricing. Another way is by legal or administrative means to restrict the quantity of a certain resource or quantity supplied of a product; the former is productive and the latter is non-productive.

  Another type of rent is the difference in value between best and secondbest usage of a resource. Compared with the above concept of rent, this is a choice between different uses of the same resource. With different usage, there will be different demand function and different supply function, and the return will also be different. For instance, the demand function of a singer performing in a bar differs from that of a singer performing in an opera house, and the number of competent singers is also different. The difference between the equilibrium prices of the two different usages is called rent.

  There are different numbers of singers for different purposes, therefore, a different supply function. The difference in supply function determines the rent generated by the different supply of resources. The difference between this and Economic Rent is that Economic Rent depicts the value differences between having a means of production and not having it (equals to zero). While the rent we discussed above is the differential between usages of the same means of production, where the second best usage value is not zero (see Figure 3.2

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  Rents, Rent-Seeking and Economic Development

  Theory and Evidence in Asia

  • Mushtaq H. Khan, Kwame Sundaram Jomo(Authors)
  • 2000(Publication Date)
  • Cambridge University Press

    (Publisher)

  CHAPTER 1 Rents, Efficiency and Growth Mushtaq H. Khan For the economist, rents refer to 'excess incomes' which, in simplistic models, should not exist in efficient markets. More precisely, a person gets a rent if he or she earns an income higher than the minimum that person would have accepted, the minimum being usually defined as the income in his or her next-best opportunity. A glance at the real world tells us that rents as excess incomes are widespread in all types of economies. Rents may take the form of higher rates of return in monopolies, the extra income from politically organized transfers such as subsidies, or the extra income which comes from owning scarce resources, whether natural resources or specialized knowledge. What does economic theory say about the effects of such excessive incomes or 'rents'? This chapter begins with an analysis of rents in conventional neo-classical economics and proceeds to examine how this analysis needs to be extended (and, to some extent, has already been extended in recent years) to analyse the different types of rents which exist in real economies. Drawing on both neo-classical and non-neoclas- sical economic theories, we see that the efficiency and growth implica- tions of different rents can be very different. While some rents are indeed inefficient and growth-retarding, other rents play an essential role in growth and development. This variability has important policy implications. The identification of some rents as 'efficient' challenges the policy rule-of-thumb of the liberal market model which says that the removal of institutions and rights which pro- tect rents is always desirable as a way of moving towards greater efficiency and better economic performance. While this model has the seductive advantage of simplicity, it is often wrong. If some rents are essential for efficiency and growth while others are damaging, more complex institu- tional and market reforms may be required.

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  Urban Land Rent

  Singapore as a Property State

  • Anne Haila(Author)
  • 2015(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  Throughout its history, starting from the works of Adam Smith and David Ricardo to those of Jevons, Marshall, William Alonso and David Harvey, rent theory and the concept of rent have changed, and the ensuing controversies split scholars into different schools. Classical economists regarded rent as a separate and important concept, whereas neoclassical economists generalised the concept of rent. Urban economics later modified the concept of rent and connected it to individual utility. To understand the concept of rent within property rights theory, I now turn to examine how the concept of rent was extended and generalised in mainstream economics.

  Extending the Rent Concept

  David Ricardo defined rent as ‘that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil’ (Ricardo [1817] 1974: 33). This definition comprises three parts: rent is the produce of the earth, is paid for the use of the earth, and is paid to the landlord. Three rent theory traditions can be identified on the basis of these three aspects of rent: mainstream economics focusing on land as a resource, urban economics on land use, and the Marxist tradition of the landlord–tenant relation.

  Ricardo's definition that rent is the produce of the earth implies that land is unique, that land has special characteristics. This became a divisive issue among economists. On the one hand, land economists (Richard Ely) and urban economists (Edwin Mills and William Alonso) regarded land as unique and special. Among the special characteristics of land are immobility, fixity in place, possibility for alternative uses, and land as a necessary condition for all activities. On the other hand, there gradually developed the idea that there is nothing special about land. Land is simply one factor of production along with labour and capital. The concept of rent then became extended (to other factors of production) and generalised (capital and labour can also produce rent). Rent became understood simply as surplus produced under certain market conditions. There is nothing unearned or immoral in rent and, most importantly, rent from an alternative use came to be regarded as a cost.

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  Managing Natural Wealth

  Environment and Development in Malaysia

  • Jeffrey R. Vincent, Rozali Mohamed Ali, Jeffrey R. Professor Vincent, Rozali Professor Mohamed Ali(Authors)
  • 2010(Publication Date)
  • Routledge

    (Publisher)

  1 is an economic surplus that countries can potentially use to finance either investment or consumption, or a mix of the two. The fundamental question is, How does the allocation of rents between investment and consumption affect economic sustainability?

  Hartwick (1977) identified the theoretical condition linking resource rents to economic sustainability. He considered the hypothetical case of a country with only nonrenewable resources and no source of investment funds other than resource rents (there are no savings from earnings in other industries). He demonstrated that even a country in such an extreme situation can maintain a constant level of per capita consumption in perpetuity, as long as it invests a certain portion of the rents in reproducible, physical (human-made) capital. This simple but striking result has become known as Hartwick’s Rule.

  Figure 2.1 illustrates Hartwick’s Rule for the case of a nonrenewable resource. Incremental production costs are given by an upward-sloping marginal cost curve: costs per unit of output escalate as production rises. For most ordinary goods, the optimal production level is determined by the intersection of price and the marginal cost curve. For natural resources, however, the optimal production point falls to the left of this point, because a resource producer must take into account not only direct production costs but also the opportunity cost associated with forgoing production in future periods: extracting a unit of the resource today precludes the extraction of that particular unit in the future. This opportunity cost is termed the user cost. In Figure 2.1 , it equals the vertical distance between price and marginal cost at the optimal production level.

  Figure 2.1 Components of resource rent (Hartwick’s Rule)

  Total resource rent is the shaded area above the marginal cost curve, below the price line, and left of the production level. The user cost divides this area into two parts. The rectangle given by the product of the user cost and the amount produced is the total Hotelling rent, and the remainder is the in-framarginal rent.2

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  Developments and Issues in the Theory of Rent

  • Carl Rollinson Bye(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  II F U R T H E R D E V E L O P M E N T S IN T H E T H E O R Y OF L A N D R E N T T HE CLASSICAL theory of rent was described in the preceding section as an explanation of the income derived from natural resources. A number of economists, considering the theory to be inadequate for this purpose, have preferred to adopt supplemental or alternative views of the character of land rent and of the forces which affect it. The most significant of these developments will be presented in this section. RENT AS A SURPLUS The Surplus May Be Measured pom the Margins. Fre-quently the differential secured by producers who have advantages over the marginal producer is called pro-ducers' surplus. This idea is applied to land rent in the following statement: The rent yielded by a piece of land is equal to the value of the surplus product yielded by the labor and instrumental capital applied to that land, over the yield of an equal amount of labor and instrumental capital applied at the in-tensive or extensive margins of cultivation. 1 This differential surplus or rent may be given other names, depending upon the emphasis desired. When an 1 Bye, Principles of Economics, p. 404. D E V E L O P M E N T S I N T H E T H E O R Y 9 effort is made to treat income from land in terms of marginal productivity, the loss of product following the withdrawal of a piece of land from cultivation is referred to as the marginal product of that land. Calculation of this loss involves allowance for the product of the released labor and capital when employed at either margin. 2 If attention is given to the social importance of land, the surplus product on any piece of land, over that of an equal expenditure at the margins, may be viewed as the measure of the specific contribution of that land to social income.

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  The Character and Logical Method of Political Economy

  • J. E. Cairnes(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  The object of a theory of rent is to explain the fact of rent, and the conditions which determine its rise and fall. In order, therefore, to judge of the theory, we must form a clear and definite idea of the fact of which it is designed to afford the explanation. The fact, then, which the theory of rent is adduced to explain is the existence in certain branches of industry of a permanent surplus value in the product, beyond what is sufficient to replace the capital employed in production, together with the usual profits which happen to prevail in the country. Thus a farmer, after replacing the circulating stock employed in cultivating his farm with the usual profits, and reserving, besides, interest on such capital as he may have sunk in outlay of a more permanent hind, finds that the proceeds of his industry still leave him an element of value. This element of value, if he be merely the occupier of his farm, goes to his landlord; or should he during the continuance of his lease be able to retain a portion of it, he will at all events on its termination be compelled by the competition of other farmers to hand it over to his landlord. On the other hand, if the farmer be himself the proprietor of the land which he tills, the sum in question will of course accrue to him along with his other earnings. In the same way the patentee of a successful invention, on selling the produce of his industry, finds himself also in possession of an element of value over and above what is sufficient to replace the cost of production, together with the ordinary profits. Now it is this surplus value, whether derived from agricultural or from manufacturing operations, whether retained by the producer or handed over to the owner of the productive instrument, which constitutes “rent” in the economic sense of that word, and the existence of which is the fact to be accounted for.

  You will observe, I say “in the economic sense of the word,” because this is one of those cases in which the necessity under which political economists are placed of using popular phraseology in scientific discussions has led to much confusion of ideas and perplexity of reasoning. The term “rent” is in popular language applied to the revenue which the proprietor of any article derives from its hire. Such a revenue, however, may owe its existence to different causes. The rent, e. g. , which a landlord receives from a farmer for the hire of his land, is derived from a surplus value in the proceeds of the farmer's industry beyond what will cover the expenses and profits of his farm. On the other hand, the building-rent of a house represents no surplus value of this kind. It is not any thing in addition to the ordinary profit, but is simply the ordinary profit or interest which the builder of the house receives on the capital which he has sunk.1

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  Petropolitics

  Petroleum Development, Markets and Regulations, Alberta as an Illustrative History

  • Alan MacFadyen, G. Campbell Watkins(Authors)
  • 2014(Publication Date)
  • University of Calgary Press

    (Publisher)

  However, for a number of Economic Rent and Fiscal Regimes 305 reasons set out above – the importance of maintaining incentives for efficient operation, the existence of uncertainty, and the inevitable inefficiencies in various rent-collection instruments – we would argue that this is an unattainable ideal. Watkins (1987b, p. 328; 2002a), for instance, suggests that the government should aim at “obtaining a preponderance of, rather than all, the apparent and uncertain long-run eco- nomic rent,” perhaps “two thirds to three quarters.” In Alberta, since the provincial government adopted explicit objectives for various departments and agen- cies in the 1990s, the aim has been to obtain a certain percentage of the petroleum industry’s “net operating revenues,” defined as industry sales revenues less operating costs, administration expenses, and taxes. The Annual Report of the Department of Energy sets the target at 20 to 25 per cent, a target that was largely met by the province until the international oil price rises in the mid-2000s. No indication is offered of the percentage this would yield of Economic Rent, but it is apparent why the province would adopt the standard it does. Net operating revenue can be clearly defined each year, whereas Economic Rent is based on life- time profits and can only be known with certainty at the end of a project’s life. Therefore, the government desires to establish a method of issuing mineral rights on Crown land to private companies which (1) pays a high proportion of profits to the government, (2) does not unduly deter exploration and development, and (3) does not induce premature abandonment of pools or excessively costly exploration, development, and production techniques. Governments also have an interest in maintaining relatively steady and predict- able revenue streams.

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