Resource rent

In economics, rent is a surplus value after all costs and normal returns have been accounted for, i.e. the difference between the price at which an output from a resource can be sold and its respective extraction and production costs, including normal return. [Scherzer, J. and Sinner, Jim, Resource Rent: Have you paid any lately? Ecologic Research Report No.8, December 2006, available at www.ecologic.org.nz] This concept is usually termed economic rent but when referring to rent in natural resources such as coastal space or minerals, it is commonly called resource rent. It can also be conceptualised as abnormal or supernormal profit.

In practice, identifying and measuring (or collecting) resource rent is not straightforward. At any point in time, rent depends on the availability of information, market conditions, technology and the system of property rights used to govern access to and management of resources.

Categories of rent

Rent can be categorised into different kinds depending on how it is created. In general one can distinguish three different kinds of rent, which can also occur together: differential, scarcity, and entrepreneurial rent. [Scherzer, J. and Sinner, Jim, Resource Rent: Have you paid any lately? Ecologic Research Report No.8, December 2006, available at www.ecologic.org.nz]

* Differential rent (also called quality or Ricardian rent) arises because of differences in the quality of similar goods or inputs (e.g. production sites). Consider two companies that extract coal of identical quality. The market price of coal is $50/t. Company X operates at a production site where it is very easy to extract coal. Its costs (including normal returns) amount to $20/t. Company Y operates at a site where it is relatively difficult to extract coal. Its costs (including normal returns) amount to $30/t. Company X will ‘create’ more resource rent because of the more accessible resource.

* Scarcity rent emanates from excess demand for (or restricted supply of) the good or resource. Consider the “production” of rock lobster where the costs to produce one rock lobster (i.e. paying for labour, the nets, and the like, and including normal profit) amount to $3. Assume the rock lobster is sold for $5 on the market. Resource rent here amounts to $2. However, assume the demand for rock lobster has gone up, so the price for rock lobster on the market has increased. As a consequence, the rock lobster may be sold for a higher price at $6. But the costs of the fisher to catch one rock lobster remain the same at $3. Resource rent increases to $3.

* Entrepreneurial rent (also called quasi-rent) can accrue due to entrepreneurial skills or managerial investments. A company may invest in advertising, training of employees, and so forth. These investments can result in a higher price (brand) or lower costs (better technology). Consider the “production” of rock lobster where the costs to produce one rock lobster (i.e. paying for labour, the nets, and the like, and including normal profit) amount to $3. Assume the rock lobster is sold for $5 on the market. Resource rent here amounts to $2. However, assume the fisher has managed to decrease the costs for catching rock lobster from $3 to $2. This could be due to his/her entrepreneurial skills and more efficient use of labour and capital. Resource rent increases from $2 to $3.

ee also

* Hotelling's rule
* Resource economics

References