Economic rent
From Hobson's Choice
In the economics sense of the word, "rent" refers to the income accruing to a productive factor for which no exact substitute exists. Hence, the owner of land receives rent for its use (even the owner is the one actually using it) because of the unique opportunities afforded by the land's unique location. "Economic rents" constitute a part of the revenue stream of factors, the part greater than what is required to induce the owner to offer them on the market. Also, "monopoly rents" are the income stream that is generated by virtue of the firm's possessing a monopoly (and hence being unique.)
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Source of Economic Rent
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For this reason, we have included a second line, the marginal revenue function. This is the increase in revenue caused by the sale on an additional unit of product. Since the price that each additional unit can command is less than the one before it, the marginal revenue is very steeply sloped downward. The monopolist seeks to produce, as all businesses do, at the point where the marginal revenue curve intersects the marginal cost curve. But since the marginal revenue curve is "inside" the demand curve, this means the monopolist will operate at levels much less than full employment. The industry, if competitive, would have produced at QC (on the right of the chart) at price (c & p)C; monopolized by a single producer, the industry produces QM at cost cM and price pM. The shaded rust-colored area represents the rents captured by the monopolist from the consumer.
In the second chart, the monopolist is able to practice price discrimination. As illustrated, the monopolist is able to sort customers into eight categories and charge them by eight separate price schedules (an example of this would be a public utility or a crooked brokerage firm). The customers may consent because they are kept in the dark (they all are told they are getting deep discounts from the official posted price, but some discounts are deeper than others), or else they are helpless--the state won't protect them from extortion, and arbitrage is impossible.
In the illustrated case, the monopolist knows the preferences of the customers and is thus able to capture their consumer surplus. This is an extraordinary ability that has recently become a lot easier thanks to the automation of consumer data, as well as reduced government scrutiny of business behavior.
Significance
From a viewpoint of economic efficiency, economic rents are bad because consumer income is tied up in excessive payments. If a good such as potassium nitrate is available at $2/tonne, but the owner is able to charge $12/tonne because of a monopoly, the community doesn't benefit from the additional $10 it spent per tonne. If the community suddenly gets the chance to buy niter from outside at $2/tonne, this will be a great benefit.
Rents differ from profits because profits are the result of a firm having average costs that are below marginal costs. If the firm is (a) a price-taker in a competitive market, and (b) plans successfully so that its marginal cost curve does indeed intersect the market price, then the firm will have an average cost that is less than the sales price, and this will be profit. In fact, this is not always possible for most firms, especially when the assignment of each cost to any unit of output may be an arbitrary accounting convention--the cost of advertising, for example. Nevertheless, provided it does not come by income through control of the market in some way, its earnings are profits.
In some cases, a firm may actually be losing money and still be making rents; it may be taking extranormal revenues from captive customers, but still be so badly managed that the costs of operation still exceed revenue. This is a common problem, since rents have to be defended by anticompetitive behavior. To the extent that they are, this is a further consequence of rents.
