The Leasing of Federal Lands for Fossil Fuels Production

By Stephen L. McDonald | Go to book overview
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3
The Relevant Economics-- Economic Rent

In this chapter and in chapter 4 we will develop an economic framework of analysis. This framework is applicable to all the minerals under discussion and is fundamental to our treatment of specific issues in later chapters. Its full development here, rather than piecemeal in connection with separate issues, not only establishes at the outset the nature of our approach and criteria of evaluation, but permits a more concise and pointed treatment of the issues when they are taken up. The framework is developed from elementary propositions in economics for the benefit of those readers who may have limited training in that discipline.

As indicated above, we shall argue that the Department of the Interior, as custodian of the affected federal lands, should lease lands for minerals production on such terms and conditions, and at such a rate, as will tend to maximize the present value of the pure economic rent derivable from them. In order to justify such a policy it is necessary to explain the nature and origin of pure economic rent, and to show that its maximization is the equivalent of maximizing the value of the lands in question to society as a whole. Such are the tasks of the present chapter.


DEFINITION OF ECONOMIC RENT

In common parlance the term rent means the payment a lessee makes to a lessor for the use of a physical asset--a farm, a house, a car, and

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