Economic rent is a payment not need to put a factor into its most productive use. But "use" is relative.
Consider a basketball player who has offers of employment in basketball from team A at $1 million, team B at $800 thousand, and team C at $500 thousand. The higher the offer, the better the team. If he did not play basketball, his best opportunity would be working as a model at $100 thousand. The economic rent paid by team A relative to team B is $200 thousand, and A need not offer more than $801K if it knows the offer from B. But if A is paid $1 million, the economic rent of him playing basketball at all is still $899,999. If the economic rent is to be taxed, there are two cases: 1) The government knows that the basketball economic rent is $899,999, and that amount is taxed. The player plays for A in order to pay the tax. 2) The government does not know the economic rent among the basketball teams, but it does know that the next best opportunity if he does not play basketball is $100,000. The government taxes the income above $100,000 at, say, 90 percent, providing an incentive for the player to accept the best offer, but still taking most of the economic rent. In both cases, the player plays for A, so the tax did not affect his choice. Fred Foldvary ===== [EMAIL PROTECTED]
