Land Rent and Economic Rent

Land Rent and Economic Rent

Land is a unique factor of production: its supply is fixed (or almost fixed). This creates a special dynamic in pricing and the concept of economic rent.

Features of Land

• Fixed supply: land cannot be produced. The quantity is limited.
• Supply curve: vertical (absolutely inelastic).
• Consequence: the price of land is completely determined by demand.

Ricardian Rent

• David Ricardo: rent is the payment for the use of the "original and indestructible powers of the soil."
• Differential rent:
  • Different plots have different fertility.
  • Marginal land (the worst used) determines the product price.
  • The best plots receive rent equal to the difference in productivity.

Economic Rent

• General concept: income above the minimum necessary to keep the resource in its current use.
• $ \text{Economic Rent} = \text{Actual Payment} - \text{Opportunity Cost} $
• Examples:
  • High salaries of sports stars (their alternative is an ordinary job)
  • Premium for rare skills
  • Income from patents

Quasi-rent

• Quasi-rent: rent in the short term for specific assets.
• Example: a plant built for a particular client. In the short term, it cannot be repurposed.
• Any income above variable costs is quasi-rent.

Rent-seeking

• Rent-seeking: activities aimed at obtaining rent without creating value.
• Examples:
  • Lobbying for protection from competition
  • Obtaining exclusive licenses
  • Lawsuits to block competitors
• Social costs: resources are spent on redistribution, not on value creation.

For the Investor

• Rent as a source of profit:
  • Companies with unique assets (brands, patents, resources) receive rent.
  • Rent is more sustainable than competitive profit.
• Analysis of sources of rent:
  • Natural resources
  • Intellectual property
  • Regulatory advantages
  • Network effects