Difference between economical rent and ordinary rent.
Explanation of Solution
In everyday life, the term rent is used to explain the payment that is made for the legal borrowing of some goods and services. For example – One pays rent for the use of a flat or apartment; one can also pay the equipment rental company for borrowing equipments. This rent is a part of capital cost of the commodity, added to the maintenance and share of taxes. On the other hand, according to an economist, economic rent is the payment made for the use of land and other natural resources which has fixed supply. For example – Rent on land. No matter how high or low the rent, the same amount of land will be available.
Now, explaining the given statement in the quotation, the land has alternative uses. To use the land in the most way, individuals and firms must compete with each other, and the winners are those who pays the highest rent. This bidding makes sense if the winner expects to make use of the land in the most productive manner than the losers.
Concept introduction:
Rent in everyday life: In everyday life, the term rent is used to explain the payment that is made for the legal borrowing of some goods and services. For example – one pays rent for the use of a flat or apartment; one can also pay the equipment rental company for borrowing equipments. This rent is a part of capital cost of the commodity, added to the maintenance and share of taxes.
Rent in terms of economics: According to an economist, economic rent is the payment made for the use of land and other natural resources which has fixed supply. For example – Rent on land. No matter how high or low the rent, the same amount of land will be available.
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