Economic Rent
One of the most important concepts in economics is that of economic rent
A mobile factor must earn a certain amount in its present use to prevent it
from moving to another use—the great nineteenth-century economist
Alfred Marshall called this amount the factor’s transfer earnings , but
most economists today would simply call it the factor’s opportunity cost.
Any amount that the factor earns above its transfer earnings is called
economic rent. Economic rent is analogous to economic profit as a
surplus over the opportunity cost of capital. Here are three examples:
1. Consider a farmer who grows wheat and earns $10 000 per
hectare. She has calculated that if her earnings fall to $9000 per
hectare, she will switch to growing barley instead, her next best
alternative. In this case, each hectare of land growing wheat is
earning $1000 of economic rent.
2. A famous actor earns $15 million per year. He knows that his next
best alternative to acting is appearing in TV commercials, in
which case he would earn $5 million per year. He is earning $10
million per year of economic rent.
3. An individual has invested $300 000 of financial capital into a
restaurant and currently earns a 20 percent annual return—
investment income of $60 000 annually. The next best alternative
investment (with similar risk) can earn a 15 percent return, or $45