Economic Rent - Hypothetical Example

Hypothetical Example

The generalization of the concept of rent to include opportunity cost has served to highlight the role of political barriers in creating and privatizing rents. For example, a person seeking to become a member of a medieval guild makes a huge investment in training and education, which has limited potential application outside of that guild. In a competitive market, the wages of a member of the guild would be set where the expected net return on the investment in training would be just enough to justify making the investment. In a sense, the required investment is a natural barrier to entry, discouraging some would-be members from making the necessary investment in training to enter the competitive market for the services of the guild. This is a natural "free market" self-limiting control on the number of guild members and/or the cost of training necessitated by certification. Some of those who would have opted for a particular guild may well decide to choose a different guild or occupation.

However, a political restriction on the numbers of people entering into the competitive market for services of the guild has the effect of raising the return on investments in the guilds training, especially for those already practising, by creating an artificial scarcity of guild members. To the extent that a constraint on entrants to the medieval guild actually increases the returns to guild members as opposed to ensuring competence, then to that extent the practice of limiting entrants to the field is a rent seeking activity, and the excess return realized by the guild members is economic rent as defined.