Resource rent

Rent can be categorised into different kinds depending on how it is created. In general one can distinguish three different kinds of rent, which can also occur together: differential, scarcity, and entrepreneurial rent. • Differential rent (also called quality or Ricardian rent) arises because of differences in the quality of similar goods or inputs (e.g. production sites). Consider two companies that extract coal of identical quality. The market price of coal is $50/t. Company X operates at a production site where it is very easy to extract coal. Its costs (including normal returns) amount to $20/t. Company Y operates at a site where it is relatively difficult to extract coal. Its costs (including normal returns) amount to $30/t. Company X will ‘create’ more resource rent because of the more accessible resource. • Scarcity rent (also called depletion or Hotelling rent) arises because extracting a finite resource today reduces the stock available for future use. As the resource becomes scarcer, its value increases even if extraction costs remain constant. Scarcity rent reflects arbitrage over time: if the present price were any lower, a producer would prefer to produce less now in order to produce more later. Consider an oil field with 1 million barrels of recoverable oil. Each barrel costs $30 to extract (including normal returns). The market price of oil is currently $50, yielding a rent of $20 per barrel. Over time, as other oil field depletes and new oil fields are harder or more costly to develop, the market price rises to $70 while extraction cost on this particular oil field remains $30. The scarcity rent per barrel has now increased to $40. • Entrepreneurial rent (also called quasi-rent or Schumpeterian rent) can accrue due to entrepreneurial skills or managerial investments. A company may invest in advertising, training of employees, and so forth. These investments can result in a higher price (brand) or lower costs (better technology). Consider the “production” of rock lobster where the costs to produce one rock lobster (i.e. paying for labour, the nets, and the like, and including normal profit) amount to $3. Assume the rock lobster is sold for $5 on the market. Resource rent here amounts to $2. However, assume the fisher has managed to decrease the costs for catching rock lobster from $3 to $2. This could be due to his/her entrepreneurial skills and more efficient use of labour and capital. Resource rent increases from $2 to $3. == Payment of royalties ==

A landowner who holds oil or mineral rights to his property may transfer those rights under a license to another party. In exchange for allowing another party to extract resources, the landowner receives either a resource rent or a "license fee" based on the value of the resources sold. When the government owns the resource, the transaction often must comply with statutory and regulatory requirements. The calculation of the value of oil and gas royalties involves estimating future revenues based on recent production trends. A common method is to take the average monthly income for the last three months and use that as a basis for forecasting. In the United States, simple ownership of mineral rights is possible, and royalty payments to individuals are quite common. Local taxing authorities may levy a severance tax on non-renewable natural resources extracted or withdrawn within their authority. The federal government receives royalties for mining on federal lands, which is managed by the Bureau of Ocean Energy Management, Regulation and Enforcement, formerly the Minerals Management Service. An example from Canada's northern territories is the federal rules on royalties for oil in border lands. The royalty rate begins at 1% of gross sales for the first 18 months of commercial production and increases by 1% every 18 months up to a maximum of 5% until initial costs are recovered, after which the royalty rate is set at 5% of gross sales or 30% of net sales. Thus, the risks and profits are shared between the Government of Canada (as the owner of the resources) and the oil developer. This attractive royalty rate is designed to incentivize oil and gas exploration in Canada's remote frontier areas, where costs and risks are higher than elsewhere. ==See also==