Economic Rent: Definition & Example

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  • 0:00 Economic Rent Defined
  • 0:46 How Does Economic…
  • 1:46 Examples
  • 3:19 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn what economic rent is and if you have ever paid or received it. Find out why it is important to understand and how it differs from the normal 'rent' that you are familiar with. Check out the examples and take a short quiz to see what you have learned.

Economic Rent Defined

Have you ever performed a job for someone and got paid more than you thought you might? Say you were willing to mow someone's yard or do a landscaping project for a set amount of money, but you end up getting paid more than you would have asked for! If you have experienced this before, you have collected economic rent.

Economic rent is the extra money or payment made over and above the amount expected by its owner. It is the positive difference between the actual payment received for the work you have done or the money a piece of land or machinery has made for you and the payment amount that was expected in the first place. Economic rent should not be mistaken for the more commonly used 'rent' term, which simply refers to payments made for using an asset or property. Economic rent can be thought of as more of a surplus amount.

How Does Economic Rent Happen?

Economic rent occurs in instances where there are scarcities for a service or when a particular person has a special timing or need for a product or service. For example, imagine that a company really needs a bilingual employee that speaks Spanish so it can better communicate and serve a specific segment of its clients. The company hires someone after several interviews and pays him $18 an hour to get started as soon as possible. The new bilingual employee would have taken $15 an hour. The $3 difference is the economic rent received by the employee.

Why does this really matter? The answer is opportunity cost. Opportunity cost is the alternative for what you could have done with that money instead. It is a way to measure how wisely you are spending your money and resources. Instead of spending an extra three dollars an hour on a bilingual employee, the company could have used the extra savings to hire a part-time assistant or perhaps to purchase new furniture in the company's main lobby. Let's look at some more examples.


Example 1: Getting a First Job After College

Let's say you're thinking you have been in school long enough and are ready to get a job! You set your sights on some local companies and narrow down your search to ten specific job postings. You tell yourself that you would take any one of these positions if they paid you $40,000 a year. After three interviews, you get an offer for $45,000 a year. You have just received $5,000 in economic rent!

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