<p>Market failure is by definition a situation when (Hindriks and Myles Intermediate Public Economics 2nd ed pp 42);</p>
<blockquote>
<p>... any of the assumptions underlying the competitive economy fail to be met and as a consequence efficiency is not achieved ...</p>
</blockquote>
<p>Rents, <em>per se</em>, are neither violations of assumptions underlying competitive markets, nor they by themselves lead to economic efficiency.  Hence they simply fail to meet criteria for market failure per se. Some economic rents can sometimes be a result of market failure but they themselves do not satisfy the definition. Hence, a rent can be at best considered a symptom of some other market failures.</p>
<p>For example, if we have market for land with demand for land given by <span class="math-container">$D= a - bp$</span> and supply given by simply <span class="math-container">$S=10$</span>, then by definition all incomes earned on that market are economic rents yet the market is allocatively efficient nor any assumptions about perfect competition are violated in the example I set. At price <span class="math-container">$p = \frac{10-a}{b}$</span> the 10 units of land will still be allocated to whomever values it the most, and even the Marshallian welfare will be maximized in this example, yet the value of <span class="math-container">$p S$</span> will still represent an economic rent, since the supply was fixed by assumption even at price, <span class="math-container">$p=0$</span> the same amount of land would be brought to the market.</p>
<p>Your question is based on false premises about rents.</p>
<blockquote>
<p>It leads to allocative inefficiency</p>
</blockquote>
<p>No it doesn't as an simple example I shown above demonstrates.</p>
<blockquote>
<p>it leads to counterproductive incentives</p>
</blockquote>
<p>This could be true depending on context, but market failures are not simply situations with &quot;counterproductive incentives&quot;.</p>
<blockquote>
<p>it leads to lower welfare</p>
</blockquote>
<p>Again not generally true. For example the level of Marshallian welfare in the simple supply and demand example will be maximized even in presence of rents. Clearly, rents by themselves do not necessarily lower welfare.</p>
<p>There isn't even single concept of welfare in policy economics. The Dwyer article defines the welfare rule it is using as the</p>
<blockquote>
<p>welfare rule of maximizing net
national income over time</p>
</blockquote>
<p>This is the <a href="https://www.jstor.org/stable/724048" rel="nofollow noreferrer">Posner (1979)</a> welfare criterion, but the article does poor job explaining its merely one possible welfare criterion, and hence the claims made in that paper about rents and welfare are simply not generally valid.</p>
<p>In any case when we talk about market inefficiency we talk about allocative efficiency, which can coincide with some measures of welfare, but it does not generally coincide with the Posner welfare criterion. We are not discussing efficiency in relation to some policy welfare criterion (e.g. utilitarian, Rawlsian, Liberal, Posner criterion etc).</p>
<blockquote>
<p>Why is it at the very least not mentioned along side externalities, monopolies, and information asymmetries in every microeconomics textbook</p>
</blockquote>
<p>I don't believe there is any undergraduate microeconomic textbook that does not explain economic rents. They are not mentioned as an example of externalities because they aren't externalities as explained above.</p>

CC BY-SA 4.0
2024-04-29T21:44:23.380Z
Thank you for your thoughtful answer. Economic land rents create a situation, where holding on to land is rewarded. This prevents the mechanism of making sure land has the most efficient use because it prevents people from selling it off to a developer who can profit off of building a higher density development. This resulting loss of housing supply must be able to be determined theoretically somehow. Is there really no deadweight loss to society from this? Or what about the loss of how investments are deferred away from business towards land?
Victor Nielsen
CC BY-SA 4.0
2024-04-29T21:56:51.777Z
@VictorNielsen I would have to examine the situation and see excactly where the impact is. A priori there does not need to be any deadweight loss. If supply shifts to the left  of anything even lets say bread on perfect market, there wont be deadweight loss automatically. The point of my answer is that rents do not automatically imply market failure. You have to add something else to the mix to create market failure. Maybe in the example you mention there is something in the mix, I don't really have enough time to do literature review on the issue. Point was just to demonstrate there
1muflon1
CC BY-SA 4.0
2024-04-29T21:57:30.517Z
rent is not market failure per se for which even one example suffices. Also in the example I am using if you shift supply from 10 to 1 there is no deadweight loss. The resulting equilibrium will still be allocatively efficient. I am not saying that in case you mention there is no deadweight loss because I don't know the research you are talking about, but if there is deadweight loss it does not stem from rent by itself, the model you are referencing has to have other properties.
1muflon1
CC BY-SA 4.0
2024-05-01T12:39:15.793Z
Thank you for your answer, I will think about this some more.
Victor Nielsen
CC BY-SA 4.0
2024-04-25T19:51:12.100Z
2024-04-25T20:20:36.013Z
2024-04-25T20:20:36.013Z
1muflon1
<p>Economic rent seems to be behind rising inequality and stagnating growth (<a href="https://www.nber.org/system/files/working_papers/w21189/w21189.pdf" rel="nofollow noreferrer">Stiglitz</a>,  2016) arguing that a wealth residual explaining both declining capital and labour shares in national income is ultimately a result of economic rents. Theoretically it has strong foundations to explain inefficiency in land use (holding of land to wait for price increase) and cause shifts in investment away from productive capabilities (capital) towards unproductive earnings (from holding land)(<a href="https://onlinelibrary.wiley.com/doi/10.1111/ajes.12082_3" rel="nofollow noreferrer">Dwyer</a>, 2014). Dwyer calls land value tax super neutral because of how it is inherently welfare improving as opposed to just neutral which is the dominant view by economists like Friedman.</p>
<p>Why is it not considered a market failure? It leads to allocative inefficiency, it leads to counterproductive incentives, and it leads to lower welfare. Why is it at the very least not mentioned along side externalities, monopolies, and information asymmetries in every microeconomics textbook?</p>
<p>I know the historical reason with John Bates Clark arguing that capital and land are the same and thus economic rents can be seen as similar to interest. However, even back then people argued that it was wrong, and today it seems authors are overwhelmingly past this and are even pointing out how Clark was influenced by powerful land interest groups (<a href="https://www.amazon.nl/-/en/Josh-Ryan-Collins/dp/135037427X" rel="nofollow noreferrer">Ryan-Collins et al., 2022)</a>.</p>
<p>So why is it today that we are not recognising the role of land and economic rents? Is this changing?</p>

<economic-growth><inequality><welfare-economics><market-failure><rent>
Why is economic rent not seen as a market failure?
Victor Nielsen
# Why is economic rent not seen as a market failure?

(Asked by: username_0 on 2024-04-25)

Economic rent seems to be behind rising inequality and stagnating growth ([Stiglitz](https://www.nber.org/system/files/working_papers/w21189/w21189.pdf), 2016) arguing that a wealth residual explaining both declining capital and labour shares in national income is ultimately a result of economic rents. Theoretically it has strong foundations to explain inefficiency in land use (holding of land to wait for price increase) and cause shifts in investment away from productive capabilities (capital) towards unproductive earnings (from holding land)([Dwyer](https://onlinelibrary.wiley.com/doi/10.1111/ajes.12082_3), 2014). Dwyer calls land value tax super neutral because of how it is inherently welfare improving as opposed to just neutral which is the dominant view by economists like Friedman.

Why is it not considered a market failure? It leads to allocative inefficiency, it leads to counterproductive incentives, and it leads to lower welfare. Why is it at the very least not mentioned along side externalities, monopolies, and information asymmetries in every microeconomics textbook?

I know the historical reason with John Bates Clark arguing that capital and land are the same and thus economic rents can be seen as similar to interest. However, even back then people argued that it was wrong, and today it seems authors are overwhelmingly past this and are even pointing out how Clark was influenced by powerful land interest groups ([Ryan-Collins et al., 2022)](https://www.amazon.nl/-/en/Josh-Ryan-Collins/dp/135037427X).

So why is it today that we are not recognising the role of land and economic rents? Is this changing?

**Tags:** economic-growth, inequality, welfare-economics, market-failure, rent

---

## 1 answers

### Answer by username_1 on 2024-04-25. Score: 1 | Accepted answer

Market failure is by definition a situation when (Hindriks and Myles Intermediate Public Economics 2nd ed pp 42);

> ... any of the assumptions underlying the competitive economy fail to be met and as a consequence efficiency is not achieved ...

Rents, *per se*, are neither violations of assumptions underlying competitive markets, nor they by themselves lead to economic efficiency. Hence they simply fail to meet criteria for market failure per se. Some economic rents can sometimes be a result of market failure but they themselves do not satisfy the definition. Hence, a rent can be at best considered a symptom of some other market failures.

For example, if we have market for land with demand for land given by $D= a - bp$ and supply given by simply $S=10$, then by definition all incomes earned on that market are economic rents yet the market is allocatively efficient nor any assumptions about perfect competition are violated in the example I set. At price $p = \frac{10-a}{b}$ the 10 units of land will still be allocated to whomever values it the most, and even the Marshallian welfare will be maximized in this example, yet the value of $p S$ will still represent an economic rent, since the supply was fixed by assumption even at price, $p=0$ the same amount of land would be brought to the market.

Your question is based on false premises about rents.

> It leads to allocative inefficiency

No it doesn't as an simple example I shown above demonstrates.

> it leads to counterproductive incentives

This could be true depending on context, but market failures are not simply situations with "counterproductive incentives".

> it leads to lower welfare

Again not generally true. For example the level of Marshallian welfare in the simple supply and demand example will be maximized even in presence of rents. Clearly, rents by themselves do not necessarily lower welfare.

There isn't even single concept of welfare in policy economics. The Dwyer article defines the welfare rule it is using as the

> welfare rule of maximizing net
> national income over time

This is the [Posner (1979)](https://www.jstor.org/stable/724048) welfare criterion, but the article does poor job explaining its merely one possible welfare criterion, and hence the claims made in that paper about rents and welfare are simply not generally valid.

In any case when we talk about market inefficiency we talk about allocative efficiency, which can coincide with some measures of welfare, but it does not generally coincide with the Posner welfare criterion. We are not discussing efficiency in relation to some policy welfare criterion (e.g. utilitarian, Rawlsian, Liberal, Posner criterion etc).

> Why is it at the very least not mentioned along side externalities, monopolies, and information asymmetries in every microeconomics textbook

I don't believe there is any undergraduate microeconomic textbook that does not explain economic rents. They are not mentioned as an example of externalities because they aren't externalities as explained above.

> **Comments:**
> **username_0**: Thank you for your thoughtful answer. Economic land rents create a situation, where holding on to land is rewarded. This prevents the mechanism of making sure land has the most efficient use because it prevents people from selling it off to a developer who can profit off of building a higher density development. This resulting loss of housing supply must be able to be determined theoretically somehow. Is there really no deadweight loss to society from this? Or what about the loss of how investments are deferred away from business towards land?  
> **username_1**: @VictorNielsen I would have to examine the situation and see excactly where the impact is. A priori there does not need to be any deadweight loss. If supply shifts to the left  of anything even lets say bread on perfect market, there wont be deadweight loss automatically. The point of my answer is that rents do not automatically imply market failure. You have to add something else to the mix to create market failure. Maybe in the example you mention there is something in the mix, I don't really have enough time to do literature review on the issue. Point was just to demonstrate there  
> **username_1**: rent is not market failure per se for which even one example suffices. Also in the example I am using if you shift supply from 10 to 1 there is no deadweight loss. The resulting equilibrium will still be allocatively efficient. I am not saying that in case you mention there is no deadweight loss because I don't know the research you are talking about, but if there is deadweight loss it does not stem from rent by itself, the model you are referencing has to have other properties.  
> **username_0**: Thank you for your answer, I will think about this some more.  

---

