Quasi-rent
Encyclopedia
Quasi-rent is an analytical term in economics
, for the income earned, in excess of post-investment opportunity cost
, by a sunk cost
investment. Alfred Marshall
(1842-1924) was the first to observe quasi-rents.
In general, an economic rent is the difference between the income from a factor of production in a particular use, and either the cost of bringing the factor into economic use (Classical factor rent), or the opportunity cost of using the factor, where opportunity cost is defined as the current income minus the income available in the next best use (Paretian factor rent). In other words, economic rent is the difference between the income in the current use of the factor and the absolute minimum required to draw a factor into a particular use (from no use at all, or from the next best use), (see detailed page economic rent
)
Many capital investments take the form of sunk cost investments in more or less highly specialized capital equipment, research and development, or training. For sunk cost investments, once the investment has been made, the cost of drawing the result into economic use may be minimal. For highly specialized equipment or training, the next best use may not pay much, so a large part of what is realized, constitutes a kind of rent. However, a sunk cost investment will only be made in the expectation that the resulting factor (e.g. capital equipment) can be employed to realize income above costs; the expectation of profitable income induced the creation of the capital factor.
While a true rent is an income in excess of what is necessary to bring a factor into productive use, a quasi-rent is only a Paretian Rent excluding the sunk cost investment. Viewed in an economic short term frame -- after the sunk cost investment has been made --.The income realized by a sunk cost investment constitutes a rent to the extent that it exceeds the amount that would be realized in the next best use
of the sunk cost investment, e.g. (you already bought the hammer and there is nothing you can do about it. If you don't use it to drive nails, then maybe it will make a good paper weight). Viewed in an economic long-term frame, which includes the decision to make the investment, the same income is not a rent, but instead might legitimately be called interest.
The existence of sunk cost investments and quasi-rents point to important problems for both business strategy and public policy, particularly in connection with natural monopolies
. A business enterprise might form, for example, to build and operate a bridge across a river, charging a toll for crossing. Efficiency requires that the bridge be fully utilized, but any toll charged will discourage some crossings. A toll set at a rate, which keeps the bridge fully utilized, will not necessarily include any return on (or even recovery of) the investment in the bridge, while a toll, which does yield a return on the investment in the bridge will not necessarily result in full, efficient utilization of the bridge.
Government
policy is sometimes designed or manipulated to ensure that particular sunk cost investments earn larger quasi-rents. Patent
s may be considered an example of such an intervention. In the absence of patents and other intellectual property law, the sunk cost investment in research behind an invention could only earn a quasi-rent to the extent that secrecy inhibited competitors from freely utilizing the results of the research. Once the sunk cost investment in research has been made, of course, efficiency would require that the results (i.e. the invention) be freely and widely disseminated, which would seem to preclude earning a return, a quasi-rent, on the research. Patents give a time-limited legal right to charge for the use of an invention, which creates a potential quasi-rent, and return on investment.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, for the income earned, in excess of post-investment opportunity cost
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
, by a sunk cost
Sunk cost
In economics and business decision-making, sunk costs are retrospective costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken...
investment. Alfred Marshall
Alfred Marshall
Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...
(1842-1924) was the first to observe quasi-rents.
In general, an economic rent is the difference between the income from a factor of production in a particular use, and either the cost of bringing the factor into economic use (Classical factor rent), or the opportunity cost of using the factor, where opportunity cost is defined as the current income minus the income available in the next best use (Paretian factor rent). In other words, economic rent is the difference between the income in the current use of the factor and the absolute minimum required to draw a factor into a particular use (from no use at all, or from the next best use), (see detailed page economic rent
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
)
Many capital investments take the form of sunk cost investments in more or less highly specialized capital equipment, research and development, or training. For sunk cost investments, once the investment has been made, the cost of drawing the result into economic use may be minimal. For highly specialized equipment or training, the next best use may not pay much, so a large part of what is realized, constitutes a kind of rent. However, a sunk cost investment will only be made in the expectation that the resulting factor (e.g. capital equipment) can be employed to realize income above costs; the expectation of profitable income induced the creation of the capital factor.
While a true rent is an income in excess of what is necessary to bring a factor into productive use, a quasi-rent is only a Paretian Rent excluding the sunk cost investment. Viewed in an economic short term frame -- after the sunk cost investment has been made --.The income realized by a sunk cost investment constitutes a rent to the extent that it exceeds the amount that would be realized in the next best use
of the sunk cost investment, e.g. (you already bought the hammer and there is nothing you can do about it. If you don't use it to drive nails, then maybe it will make a good paper weight). Viewed in an economic long-term frame, which includes the decision to make the investment, the same income is not a rent, but instead might legitimately be called interest.
The existence of sunk cost investments and quasi-rents point to important problems for both business strategy and public policy, particularly in connection with natural monopolies
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
. A business enterprise might form, for example, to build and operate a bridge across a river, charging a toll for crossing. Efficiency requires that the bridge be fully utilized, but any toll charged will discourage some crossings. A toll set at a rate, which keeps the bridge fully utilized, will not necessarily include any return on (or even recovery of) the investment in the bridge, while a toll, which does yield a return on the investment in the bridge will not necessarily result in full, efficient utilization of the bridge.
Government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
policy is sometimes designed or manipulated to ensure that particular sunk cost investments earn larger quasi-rents. Patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
s may be considered an example of such an intervention. In the absence of patents and other intellectual property law, the sunk cost investment in research behind an invention could only earn a quasi-rent to the extent that secrecy inhibited competitors from freely utilizing the results of the research. Once the sunk cost investment in research has been made, of course, efficiency would require that the results (i.e. the invention) be freely and widely disseminated, which would seem to preclude earning a return, a quasi-rent, on the research. Patents give a time-limited legal right to charge for the use of an invention, which creates a potential quasi-rent, and return on investment.