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Rent Seeking
The effects of a tariff, which is an excise
tax on imported items, are the same as any excise tax:
the tariff will raise price, reduce quantity, and decrease
the consumers' surplus. A quota is a restriction of
imports that also raises price, reduces quantity, and
decreases the consumers' surplus. For example, in 1985, the
world price of sugar was a bit over three cents a pound,
whereas the U.S. price was more than six times the world
level. This price differential existed because only 2.677
million tons of foreign sugar were allowed into the U.S. A
tariff could produce the same price differential, but unlike
a tariff, a quota produces no revenue for the
government.
The right to sell sugar in the U.S. has been valuable.
One who had that right could buy sugar at the world price
and sell it in the U.S. for six times as much. It would seem
that import quotas create a windfall gain for the lucky few
who have government permission to import. Sometimes they do.
But the situation may be more complex.
When the right to import--to buy a product cheaply in the
foreign market and to sell it dear in the domestic
market--is valuable, there should be competition for that
right. This competition may take the form of campaign
contributions, lobbying, or spending money to prepare
proposals submitted to a government bureaucracy. Economic
resources are used to obtain this governmentally created
right, and as a result, there is not merely a transfer from
one group to another, as happens with the tariff illustrated
below. The actual social loss is not only the triangular
area c-d-e in the graph below, but also the resources
spent in competition for the surplus a-c-b-e.
In their quest for value, people choose between two
paths. They can obtain value through exchange by providing a
good or service that others consider valuable.
Alternatively, they can seek to have value transferred to
them without providing anything in return. The first path is
one of profit seeking, and it has the desirable side
effect of forcing people to serve the public by providing
products the public wants at prices they will pay. The
second path has become known as rent seeking, a term
descriptive only to those who know something of the history
of economic analysis. Unlike profit seeking, rent seeking
has no desirable side effect, but rather can cause a serious
waste of society's scarce resources. In different terms,
profit seeking is a positive-sum game, whereas rent seeking
is a negative-sum game.
Rent seeking often involves government because
governments transfer huge amounts of money for which people
can compete. For an example of the forces involved, consider
a government agency that gives grants to colleges for
equipment to improve teaching. Suppose that a program gives
grants averaging $40,000. This money, which has been taken
from taxpayers, is not given randomly, but is distributed on
the basis of a competition of grant proposals. If one in ten
proposals wins (a realistic assumption for many grants) and
if the average proposal costs $2000 to prepare (also
realistic given the value of time of faculty members,
professional grant writers, and secretaries needed to
prepare a proposal), then colleges will use resources worth
$20,000 for each $40,000 they obtain.1 The end
result is that the government is not simply taking $40,000
from one person's pocket and putting it into another
person's pocket. There is also a use of resources worth
$20,000 to switch this money from one pocket to another.
Rent seeking can occur whenever people can compete for
some existing value. Many interesting cases involve the
government because the government can use force in ways that
no private citizen or group of citizens can, and that use of
force can be made to enrich some at the expense of
others.2 Rent seeking includes competition for
subsidies, for special jobs, and for exclusive rights to
produce or sell products. Economists often assume that
transfers simply redistribute income, with at most a small
welfare loss. The topic of rent seeking seriously questions
this assumption. If rent seeking is important enough in a
society--if too much effort of those who have talent and
desire is channeled into rent seeking rather than profit
seeking--serious harm can be done to a country's growth and
development.
Finally, the basic insights of the self-interested view
of government and rent seeking suggest that societies based
on free markets and democratic governments are unusual and
exceptional. Indeed, what is somewhat difficult to explain
is how democratic market societies manage to begin and
continue to exist. It would not seem to be in the interests
of those with government power to allow them to begin, but
the self-interest view says that it must have been. On the
other hand, these insights help explain the endurance of
socialism (the absence of significant private ownership of
productive resources, which means that all decision-makers
are government employees), despite its poor record in
improving the lot of the average citizen. Socialism
concentrates decisions at the center of a society and thus
increases the power of government officials compared to what
it would be with a market economy.
1In most competitions, some
people or colleges have a much better than a one-in-ten
chance, and others have a worse than a one-in-ten chance. If
it cost all entrants $2000 to prepare a proposal, the
competition described above would not attract anyone with
less than one-in-twenty chance of winning.
2 Other interesting examples are theft
and civil suits in the legal system (which does involve the
government to some extent).
Copyright
Robert Schenk
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