Economic Rent

Economic Rent

Economic Rent or Economic surplus. The earnings of a factor of production in excess of the minimum sum necessary to keep it in its existing use and prevent it moving to other uses (the 'supply price'). This minimum sum will depend on employment opportunities available to the factor elsewhere: hence it is also described as 'opportunity cost' or 'transfer earnings'. These will be larger (and thus the element of economic surplus in earnings smaller) the more adaptable the factor, the longer the period of time considered, the more narrowly alternative occupations are defined and (with human resources) the more similar people's attitudes are towards uncertainty.

The use of a factor of production winch is completely specific (adaptable to only one use) requires no alternatives to be forgone: its opportunity cost is nothing, and the whole of its earnings are economic surplus as defined above, the amount depending on the extent of the demand for the available supply of the factor. If all possible uses of land are regarded as one kind of employment, the earnings of the fixed supply of land are entirely economic rent: it has no supply price; it would still be there whether it earned anything or not. Hence the term rent is used to describe (by analogy) the earnings of any factor that is limited in supply and adaptable to only one use. The earnings of most factors include elements of economic rent, especially in periods of time so short that existing supplies can be neither adapted to other uses nor easily enlarged in response to falls or rises in demand.

The doctrine of economic surplus or rent has been used to support arguments for fiscal policies aimed at taxing incomes regarded as 'unearned' in this sense, particularly land rents and land values. In theory the effect of such taxation on the supply of, for example, land forthcoming for economic use would be nil (since it is a tax on pure surplus); but in practice the effects on the pattern of land use could be significant and the distribution of the tax among individuals uncertain. Moreover economic rent is now recognized as an element likely to enter into the incomes of all factors to some extent, rather than as a separate category of income earned only by one type of factor.(2) The term is also often used in the property market to mean a full market rent, i.e., a rent for residential, commercial or other real property sufficient to yield a rate of return on the capital at least equal to the return currently earned on other investments of comparable risk. It is sometimes used by local authorities that provide subsidized housing to mean the rent that would be sufficient to cover either actual or average annual loan charges and other outgoings. Alternatively, it is the rent currently being paid in the open market for similar (unsubsidized) accommodation.

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