payment to keep it in its present use. In this case, there are no transfer
earnings and so the whole of the payment is economic rent.
The more usual situation is that of an upward-sloping supply curve, as
shown in part (ii) of Figure 13-4. A rise in the factor’s price serves the
allocative function of attracting more units of the factor into the market in
question, but the same rise provides additional economic rent to all units
of the factor that are already employed. We know that the extra pay that is
going to the units already employed is economic rent because the owners
of these units were willing to supply them at the previous lower price.
The production and sale of oil provides a good example of the
relationship between economic rent and market price. Oil is extracted
and refined in various parts of the world at vastly different costs of
production, but is typically sold at a common world price. Suppose a
producer in Alberta’s oil sands incurs costs of production of $60 per barrel
while a producer in Saudi Arabia incurs costs of only $20 per barrel. At a
world oil price of $60, the Alberta producer is marginal and is earning
transfer earnings only; any decrease in the world price would lead the
Alberta producer to reduce output. The producer in Saudi Arabia,
however, is earning significant rent on each barrel of oil produced; the
world price would have to fall below $20 before Saudi Arabia would
reduce its output below its current levels. In terms of Figure 13-4 , the
world supply of oil is as depicted in part (ii), with the Saudi Arabian
producer farther to the left along the supply curve and the Alberta
producer closer to the market equilibrium.