What is economic rent?

Economic rent is a hard term to grasp. According to David Ricardo, rent arises on account of fixed supply of land. But he recognizes other factors which are found in fixed supply in the short term. The additional income earned by these factors in the short-period is similar to rent.

Any payment to a factor of production received in excess of its opportunity cost is economic rent. In our setting, we can safely say that economic rent is used interchangeably with economic profit. Investopedia.com is correct in saying that rent is not the same as normal profit or producer surplus. Normal profit occurs when the economic profit is zero, and profit in excess of the normal profit (i.e., economic profit) is economic rent. Producer surplus is also different from economic profit because it does not take into account of the fixed cost for production (recall that the supply curve is the same as the marginal cost curve, and marginal cost curve does not reflect fixed cost), so economic profit of a producer is less than the producer surplus.

The definition given in the textbook is not wrong, but confusing and unclear. Consumer surplus and producer surplus COULD POTENTIALLY be part of the economic rent. As mentioned above, producer surplus is greater than the economic profit so not all of it is economic rent. Consumer surplus can be switched to economic rent when the producer finds a way to capture it as profit by rent-seeking. When there are no barriers to entry, competition always drives down the economic profit to zero, so economic rent would not exist. Rent-seeking can therefore be considered as ways to mitigate or eliminate competition.

Quasi-rent is a temporary economic rent like returns to a supplier/owner. Quasi-rent differs from pure economic rent in that it is a temporary phenomenon. It can arise from the barriers to entry that potential competitors face in the short run, such as the granting of patents or other legal protections for intellectual property by governments. It can also arise due to entrepreneurial responses to market fluctuation, or due to a lack of real capital to meet near-term increases in demand. In the longer term, however, the opportunity to profit will generate new capital and competition will eliminate the quasi-rent. The joining of opportunism with appropriable quasi-rents (transaction-specific investments) is a leading factor in explaining decisions to vertically integrate. Quasi-rent refers to that additional income which is similar to rent.