Quasi-Rent Essay, Research Paper

OK, let me explain it from ground zero. There are many differentmeanings of the word “rent” in economics, but the #1 modern usage is”An earning in excess of opportunity cost.” A worker earning $10an hour, when their alternative on the open market is merely $9,is considered to earn a $1/hr rent. (Why use the word “rent”? Well,it all goes back to Ricardo and other classical economists. Sincethe land is just “there,” they figured that from some point of view,the opportunity cost of land is zero. The term rent then got expandedto apply to anything “land-like”; i.e., any resource that is “justthere” and the existence of which does not depend upon its being paid.)The general assumption is that rents are just useless inefficiencies. They are basically just like the government granting a monopoly on salt;the price of salt then exceeds its opportunity cost, and for no goodreason. A quasi-rent is different. It LOOKS a lot like a normal rent; froma superficial viewpoint, it is a reward paid to a factor which exceedsits opportunity cost. But if you look deeper, you see that in fact,the rent is a necessary incentive for something. For example, a patentlooks a lot like a monopoly salt grant on the surface. The pricingpolicies of the patent-holder and the salt-monopolist look a lot alike.

But the crucial difference is that the patent-holder had to do somethingto GET the rent; he had to develop a new product. In the long-run,no industry can earn more than the normal rate of return, so the effectof the patent is just to get more people to try to invent products;enough people so that inventing things earns the same average rate ofreturn as anything else. What do quasi-rents compensate for? The obvious example is innovation. A lot of innovations are hard to patent, but an industry leader likeMicrosoft can be reimbursed for its R&D by winning a leading positionin the market. Other good candidates include search (a worker earnsmore money because looking around for better jobs takes effort whichmust be compensated). Also — quasi-rents may be paid for productvariety. When products are heterogeneous, there is room to chargea little above opportunity cost; but the incentive effect of this”breathing space” is to encourage the satisfaction of consumers’ diversetastes. Of course, it would be more efficient to pay a one-time, lump-sum”bounty,” and then price the product at opportunity cost; but thatusually isn’t workable. The real world system is pretty damn good,once you give it a chance to understand it on its own terms.