Rents are revenues over and above the normal return on investment that result from possession of assets which are scarce or exclusive. The assets may be tangible (e.g. land, oil & gas) or intangible (e.g. patents). In economic theory rents are also known as ‘economic rent’.
See several examples in the Introduction
Rent-seeking is any deliberate attempt to obtain rents. In the words of Adam Smith, rent-seekers “love to reap where they never sowed” (The Wealth of Nations, [1776] 1976; book I, ch. VI, p. 67). In other words, rents are revenues for which no corresponding investment is done.
Why are rents important?
A frequent cause of rents is limited competition due to political power or market power. For example: lobbying, possession of patents, or other bargaining power which enables a firm to increase prices more than in a competitive market. Such rents are not inevitable: stronger institutions, improvement of regulations, checks & balances, and countervailing power can promote competition and reduce rents. However, this may take a long time before it is successful, and success is not guaranteed. Therefore taxation of rents is useful so that part of the rents flow back to society. In addition: a tax on rents will reduce the incentive for rent-seeking. Figure 2 summarizes this and the next paragraph.
Figure 2 What to do with rents
Another important cause of rents is possession of natural scarce assets, such as land, oil & gas, or unique human talents. In that case rents are a fact of life, and such rents may be functional because they incentivize proper use of natural scarce resources. But also in that case a tax on rents is a good idea because it does not have a negative effect on economic activity: the tax affects only the above-normal returns. To tax rents will be even beneficial for the economy if the revenues of taxing rents are used to reduce other taxes which do affect economic activity, such as the tax on labor income or the tax on normal profits.
My objective is to promote attention for rents and rent-seeking. The target audience of rents101.com includes anyone who is interested, not only the experts. Comments and suggestions are very welcome. Sincerely yours, Arend Stemerding.
Contact
email: economicrents ( at ) gmail ( . ) com
I live near Amsterdam, the Netherlands, with my wife Girke. The focus of my research is on economic rents by non-financial firms. I am a part-time PhD student at the University of Groningen.
Rents 