What is economic rent? How is it determined?

Economic rent, in the modern theory of rent given by Joan Robinson, is the surplus that a factor of production earns over and above its transfer earning — the minimum payment needed to keep it in its present use — and it is determined by the demand for and supply of the factor.

1. Meaning: economic rent = actual earning − transfer earning, i.e. the earning in excess of the factor's opportunity cost.
2. Actual earning: the total value a factor earns in its current employment.
3. Transfer earning: the minimum payment required to retain the factor in its present use (its next-best alternative earning).
4. Applies to all factors: economic rent is earned not only by land but by any factor whose supply is limited, so labour and capital can earn it too.
5. Determined by demand and supply: the rent is fixed at the intersection of the factor's demand and supply curves, and its size depends on the elasticity of supply.
6. Perfectly inelastic supply: when supply is completely fixed (as with land), transfer earning is zero and the whole earning is economic rent; the supply curve is vertical.
7. Perfectly elastic supply: when the supply curve is horizontal, actual earning equals transfer earning, so there is no economic rent.
8. Relatively elastic supply: when the supply curve slopes upward, only the surplus above the factor's minimum earning is economic rent, so the factor earns partial rent.
9. Determining diagram: with a normal upward-sloping factor supply curve and downward-sloping demand curve meeting at E, the area above the supply curve and below the factor price is the economic rent, and the area under the supply curve is transfer earning.
10. Example: prime land in central Kathmandu, being almost fixed in supply, earns nearly all its return as economic rent, whereas a factor available in perfectly elastic supply earns none.

Thus, economic rent is the excess of a factor's actual earning over its transfer earning, and it is determined by the demand for and supply of the factor — equal to the whole earning when supply is fixed, nil when supply is perfectly elastic, and a partial surplus when supply is relatively elastic.