From Wikipedia, the free encyclopedia/ Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics
This article is about economic rent in political economy and socioeconomics. For other uses, see Rent (disambiguation).
In economics, economic rent is any payment to a factor of production in excess of the cost needed to bring that factor into production. In classical economics, Economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents). In neoclassical economics, economic rent also includes income gained by beneficiaries of other contrived exclusivity, such as labor guilds and unofficial corruption.Economic rent should not be confused with producer surplus, or normal profit, both of which involve productive human action. Economic rent is also independent of opportunity cost, unlike economic profit, where opportunity cost is an essential component. Economic rent should be viewed as unearned revenue[citation needed], whereas economic profit is a narrower term describing surplus income greater than the next best risk-adjusted alternative. Unlike economic profit, economic rent cannot be eliminated by competition, since all value from natural resources and locations yield economic rent.[citation needed]
In regard to labor, economic rent can be created by the existence of guilds or labor unions (e.g., higher pay for workers, where political action creates a scarcity of such workers). For a produced commodity, economic rent may also be due to the legal ownership of a patent (a politically enforced right to the use of a process or ingredient). For operating licenses, it is the cost of permits and licenses that are politically controlled as to their number, regardless of the competence and willingness of those who wish to compete in the area being licensed. For most other production, including agriculture and extraction, economic rent is due to a scarcity of natural resources (e.g., land, oil, or minerals). When economic rent is privatized, the recipient of economic rent is referred to as a rentier.
By contrast, in production theory, if there is no exclusivity and there is perfect competition, there are no economic rents, as competition drives prices down to their floor.[1][2]
Economic rent is different from other unearned and passive income, including contract rent. This distinction has important implications for public revenue and tax policy.[3][4][5] As long as there is sufficient accounting profit, governments can collect a portion of economic rent for the purpose of public finance. For example, economic rent can be collected by a government as royalties or extraction fees in the case of resources such as minerals and oil and gas.
Historically, theories of rent have typically applied to rent received by different factor owners within a single economy. Hossein Mahdavy was the first to introduce the concept of "External rent", whereby one economy received rent from other economies.[6]
Contents
[hide]Definitions[edit]
According to Robert Tollison (1982), economic rents are "excess returns" above the "normal levels" that are generated in competitive markets. More specifically, a rent is "a return in excess of the resource owner's opportunity cost".[7]Henry George, best known for his proposal for a single tax on land, defines rent as "the part of the produce that accrues to the owners of land (or other natural capabilities) by virtue of ownership" and as "the share of wealth given to landowners because they have an exclusive right to the use of those natural capabilities."[8]
The law professors Lucian Bebchuk and Jesse Fried define the term as "extra returns that firms or individuals obtain due to their positional advantages."[9]
In simple terms, economic rent is an excess where there is no enterprise or costs of production.
Classical factor rent[edit]
Classical factor rent is primarily concerned with the fee paid for the use of fixed (e.g., natural) resources. The classical definition is expressed as any excess payment above that required to induce or provide for production.- "A payment for the services of an economic resource which is not necessary as an incentive for its production";[10] this can be simplified to when there is no enterprise given by the receiver of the economic rent
- "Any payment that does not affect the supply of the input";[11] this can be simplified to when there are no costs of production by the receiver of the economic rent
- "A payment to any factor in perfectly inelastic supply"[11]
Neoclassical Paretian rent[edit]
Neoclassical economics extends the concept of rent to include factors other than natural resource rents. But the labeling of this version of rent may be opportunistic or incorrect in that Vilfredo Pareto, the economist for whom this kind of rent was named, may or may not have proffered any conceptual formulation of rent.[12][13] The neoclassical understanding of "economic rent" is synonymous with the more appropriately named term "economic profit".- "The excess earnings over the amount necessary to keep the factor in its current occupation"[14]
- "The difference between what a factor of production is paid and how much it would need to be paid to remain in its current use"[15]
- "A return over and above opportunity costs, or the normal return necessary to keep a resource in its current use"[16]
Monopoly rent[edit]
Some returns are associated with legally enforced monopolies like patents or copyrights. In addition, companies like Microsoft and Intel have important de facto monopolies that can be quite valuable. The American Medical Association has traditionally regulated the number of students that each US medical school can graduate and has been accused of maintaining the high incomes of doctors by restricting the supply of new doctors.[17] Some businesses, like public utilities, are by their nature monopolies. George Stigler estimated the impact of rents from non-labor monopolies on the US economy to be fairly low.[citation needed]Land rent[edit]
In political economy, including physiocracy, classical economics, Georgism, and other schools of economic thought, land is recognized as an inelastic factor of production. Rent is the share paid to freeholders for allowing production on the land they control."As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ...."David Ricardo is credited with the first clear and comprehensive analysis of differential land rent and the associated economic relationships (Law of Rent).
Johann Heinrich von Thünen was influential in developing the spatial analysis of rents, which highlighted the importance of centrality and transport. Simply put, it was density of population, increasing the profitability of commerce and providing for the division and specialization of labor, that commanded higher municipal rents. These high rents determined that land in a central city would not be allocated to farming but be allocated instead to more profitable residential or commercial uses.
Observing that a tax on the unearned rent of land would not distort economic activities, Henry George proposed that publicly collected land rents (land value taxation) should be the primary (or only) source of public revenue, though he also advocated public ownership, taxation, and regulation of natural monopolies and monopolies of scale that cannot be eliminated by regulation.
Labour[edit]
 | This section does not cite any references or sources. (October 2010) |
However, a political restriction on the number of people entering into the competitive market for services of the guild has the effect of raising the return on investments in the guild's training, especially for those already practicing, by creating an artificial scarcity of guild members. To the extent that a constraint on entrants to the guild actually increases the returns to guild members as opposed to ensuring competence, then the practice of limiting entrants to the field is a rent-seeking activity, and the excess return realized by the guild members is economic rent.
The same model explains the high wages in some modern professions that have been able to both obtain legal protection from competition and limit their membership, notably medical doctors, actuaries, and lawyers. In countries where the creation of new universities is limited by legal charter, such as the UK, it also applies to professors. It may also apply to careers that are inherently competitive in the sense that there is a fixed number of slots, such as football league positions, music charts, or urban territory for illegal drug selling. These jobs are characterised by the existence of a small number of rich members of the guild, along with a much larger surrounding of poor people competing against each other under very poor conditions as they "pay their dues" to try to join the guild. (Reference: "Freakonomics: Why do drug dealers live with their Moms?").
Terminology relating to rent[edit]
- Gross rent
- Gross rent refers to the rent paid for the services of land and the capital invested on it. It consists of economic rent, interest on capital invested for improvement of land, and reward for the risk taken by the landlord in investing his or her capital.
- Scarcity rent
- Scarcity rent refers to the price paid for the use of homogeneous land when its supply is limited in relation to demand. If all units of land are homogeneous but demand exceeds supply, all land will earn economic rent by virtue of its scarcity.
- Differential rent
- Differential rent refers to the rent that arises owing to differences in fertility of land. The surplus that arises due to difference between the marginal and intra-marginal land is the differential rent. It is generally accrued under conditions of extensive land cultivation. The term was first proposed by David Ricardo.
- Contract rent
- Contract rent refers to rent that is mutually agreed upon between the landowner and the user. It may be equal to the economic rent of the factor.
- Information rent
- Information rent is rent an agent derives from having information not provided to the principal.
See also[edit]
- Georgism
- land (economics)
- List of economics topics
- Quasi-rent
- Rent seeking
- FIRE economy
- Rentier state
- Hotelling rent
- Ricardian rent
- Schumpeterian rent
- Johann Heinrich von Thünen
- Differential and absolute ground rent
- Property income
- Unearned income
References[edit]
- Jump up ^ "Economics A-Z terms beginning with R". The Economist.
- Jump up ^ What is Economic Rent?
- Jump up ^ Kittrell, Edward R. (1957). "Ricardo and the Taxation of Economic Rents". The American Journal of Economics and Sociology 16 (4): 379–390. doi:10.1111/j.1536-7150.1957.tb00200.x. JSTOR 3484887.
- Jump up ^ Goode, Richard B. (1984). Government finance in developing countries. Brookings Institution Press. ISBN 978-0-8157-3195-5. Retrieved 2010-05-27.
- Jump up ^ Hammes, John K (1985). "Chapter 6 - Economic Rent Considerations In International Mineral Development Finance". Finance For The Minerals Industry. AIME. ISBN 0-89520-435-5. Retrieved 2010-07-18.
- Jump up ^ Hossein Mahdavy, "The Pattern and Problems of Economic Development in Rentier States: The Case of Iran", in Studies in the Economic History of the Middle East, ed. M.A. Cook (Oxford University Press, Oxford, 1970)
- Jump up ^ Tollison, Robert D (1982). "Rent seeking: A Survey". Kyklos 35 (4): 575–602. doi:10.1111/j.1467-6435.1982.tb00174.x. Retrieved 2010-07-21.
- Jump up ^ George, Henry (1880). "Chapter 11 The Law of Rent". Progress and Poverty (4 ed.). Robert Schalkenbach Foundation 2006. ISBN 0-665-09522-8.
- Jump up ^ Pay Without Performance — the Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried, Harvard University Press, 2004, (p.62)
- Jump up ^ "Definition of economic rent". HighBeam.com: Online Dictionary (www.highbeam.com). 2001-01-01. Retrieved 2010-05-27.
- ^ Jump up to: a b Wessels, Walter J. (2000). "Chapter 27 Economic Rents". Economics (3 ed.). Barrons Educational Series Inc. p. 479. ISBN 0-7641-1274-0.
- Jump up ^ Bird, Ronald; Tarascio, Vincent J (1999). "Paretian Rent versus Pareto's Rent Theory : A Clarification and Correction". In John Cunningham Wood and Michael McLure. Vilfredo Pareto: critical assessments of leading economists 2. Routledge (Taylor & Francis Group). p. 474. ISBN 0-415-18501-7.
- Jump up ^ Foldvary, Fred E. (Jan 2008). "The marginalists who confronted land". The American Journal of Economics and Sociology.
- Jump up ^ Shepherd, A. Ross (1970). "Economic Rent and the Industry Supply Curve". Southern Economic Journal 37 (2): 209–211. doi:10.2307/1056131. JSTOR 1056131.
- Jump up ^ "Definition: economic rent". Research Tools Economics A–Z (The Economist (economist.com)). Retrieved 2010-05-27.
- Jump up ^ Morton, John S.; Goodman, Rae Jean B. (2003). "The Story of Economic Rent: What do Land, Athletics and Government have in Common". Advanced Placement Economics (3 ed.). National Council on Economic Education. p. 266. ISBN 1-56183-566-8.
- Jump up ^ Berlant, Jeffrey (1975). Profession and Monopoly: a study of medicine in the United States and Great Britain. University of California Press. ISBN 0-520-02734-5.
- Jump up ^ "Wealth of Nations B.I, Ch.6, Of the Component Parts of the Price of Commodities"
External links[edit]
- Definition of economic rent at Economist.com
- The Art of Rent, a series of seminars at Queen Mary University of London.
- Rent-Seeking Network Rent-Seeking papers by Behrooz Hassani
- Agricultural economic rent
Media darling TOMS Shoes is making the case that it can provide shoes to a lot of the world...it doesn't translate everywhere, but it's very fun to think about.
So, it's a nutty idea. But suppose I'm a rich nut who likes beer. Suppose it costs a million dollars to set up a beer producing business and I have a million dollars lying around. Is there a way for me to set up a non-profit to produce beer with a board of directors and whatever else most non-profits have? More specifically, could I legally prevent my non-profit from ever distributing profits?
I'm not worried about the tax issues. If the government wants to tax the retained earnings, the non-profit could just pay the taxes. What I am concerned about is the legal structure. Could a beer producer be set up that is legally prevented from paying dividends?
If you are successful in getting a 501(c)(3) for such a brewery, then you would be prohibited from distributing profits or dividends to investors or directors. Any violation of that would result in the IRS yanking your nonprofit status.
But... since you're not worried about paying taxes on the non-charitable income, that's not really an issue for you, therefor, not much of a deterrent.
Other than the fun of thinking of a nonprofit brewery, I think the bigger question is why such an enterprise would want to organize as a nonprofit in the first place? The tax-exempt status is what most are after. If you don't care about that, then why bother?
So, just for fun, how can we justify a brewery as a social enterprise? How about we open it up in Milwaukee and come up with a "cultural preservation" mission?
Sam: Absolutely, for-profit companies can "do well by doing good." But "all the needs"? Probably not. While many needs can be met through creative use of the profit motive, many more needs arise out of market failures of some kind.
I believe there are some needs that only a nonprofit can fulfill because there's simply no way to turn a profit on solving it. But I'd love to see you try to prove me wrong!
I don't think there is a social reason in the usual sense to develop a non-profit brewery.
I'm coming at this trying to figure out if we need for-profit businesses at all. Here's an analogy. Government used to be a for-profit venture. Kings would provide law and order and make a tidy profit in the process. Eventually we discovered that an elected government could provide law and order and other government services without paying decision makers obscene amounts of money. People used to think there was something special about kings that was needed to govern well. We've gotten over it.
Is there something special about investors in for-profit businesses that is needed for them to work well? If not, I'd want to give them the heave-ho too. I was just curious how much legal changes would be needed to run traditional for-profit enterprises on a non-profit basis.
Finally, in a broad sense, all of economic production is intended to benefit society. If people want beer, it's socially useful. It makes them happy.
"Nonprofit" has to do with your tax status, and is definitely not a way to approach doing business.
Margaret
http://grantfoundation.net
Please consider this for us your insight and assistance is vital.
Tiles for Smiles is a nonprofit organization dedicated to the advancement of Children with Cerebral Palsy. Our purpose is to provide schools, religious and other charitable organizations a resource to expand their fund raising activities by producing engraved tile, stone and any other product that can assist their efforts and financial growth. Through the production and sale of specialty craft items, and participation in local craft events, we will raise support, awareness and funding. Our intention is to grow to enable a greater level of financial assistance for local and national therapeutic centers along with organizations that support Children with Cerebral Palsy.
We are currently in our final stages with the IRS in consideration of our 501 tax exempt status and question 13 goes just like this –
Please explain how granting exemption to would not provide an unfair advantage by operating as an exempt organization, over for-profit competitors. Competition with commercial firms is strong evidence of the predominance of nonexempt commercial purpose for determining weather an organization can be classified as tax exempt. And if the conduct of a business with apparently commercial character is a taxpayer’s sole activity the fact weighs heavily against exemption.
All officers are non-compensated (volunteers) as we are a volunteer organization.
Any opinions on this would be very much appreciated.
THANK YOU
Peace
Tom P.
The appearance (whether deliberate or innocent) would be that you're using the tax-exempt status of the nonprofit to raise capital for a business on which you would keep the profit for personal use.
You'd need to have a very strong argument for why that business is mission related, and not just an attempt to circumvent tax laws, to even think about trying it.
There are numerous social reasons that could be invoked earnestly for a non-profit brewery. Before I even came across this discussion, I had mulled over the very idea on my own.
Any of the following could be relied up sincerely (perhaps even more than one):
* bolstering local production of an otherwise nationally & internationally distributed product
* bolstering local consumption of brewing inputs -- materials, equipment, grains, bottles
* training workers in the brewing arts in particular and business in general
* reducing the carbon footprint in the consumption of beer: a beer produced & consumed locally, with as much of its inputs being locally sourced as well, has a much greener profile than a beer that has been trucked halfway across the country.
Enjoy.
Thanks, too, for stirring this discussion.
This is a brewer in MN who donates all of its profits to charities through it's Community Fund. Just to add to the discussion of a nonprofit brewery!
Yes this is a simplified example and there are a multitude of variations on the theme. My point is to not mix up tax exemption and Not For Profit. They are not the same thing.
After all, there is a non profit that studies the mating habits of the housefly. Figure that one out.
It is a weatherization service that will be offered to paying clients; with the proceeds going right back into the non-profit.
Initially, I was going to set up a LLC but now I am considering setting it up under the non-profit organization.
As long as the profits are used to supplement the non-profit I should be ok, right?
If you do the for-profit weatherization under the non-profit, the IRS could take issue. Even though it's financially supporting the organization, if it doesn't fit into the mission, they'll consider it "Unrelated Business Income" and want you to pay taxes on it. You may want to run this past your lawyer and/or auditor for confirmation. Best of luck!