Economic rent
Topic: Factors of Production, Entrepreneurship and Startups · NCERT: Beyond NCERT
Meaning
Economic rent is the payment a factor of production gets above its transfer earnings. Transfer earnings are the smallest payment needed to keep the factor in its present use. The idea began with David Ricardo's differential rent: more fertile or better-located land earns a surplus over the worst land in use. Today it applies to any factor, whether land, labour or capital. It matters because it shows how much of a factor's income is pure surplus rather than a reward needed to keep it working.
Example
Suppose a star cricketer would earn ₹10 lakh a year in their next-best job, but earns ₹10 crore from playing. About ₹9.9 crore of that is economic rent. A prime plot in a city centre earns a similar surplus over an ordinary plot.
Don't confuse with
- Rent (contract rent): this is a payment for using land or property, such as a monthly lease. Economic rent is a surplus that any factor can earn.