0.9 Corrosion of institutions: rent-seeking  (Page 5/10)

Why?

Consumers of shoes lose as a result of monopolization. They pay higher prices. This robs them of what we call consumer surplus.

In fact, consumers lost consumer surplus equal to the big trapezoid (P _m P _c ZC).

But, this is partly counterbalanced by the producer surplus received by the monopolist (rectangle) in the form of rents. (P _m ZP _c O).

But part of the loss in consumer surplus is not received by the monopolist. The triangle (ZOC). This is dead weight loss, or efficiency loss, is familiar to you they are often called Harberger Triangles after Hal Harberger of Chicago.

Now, what is the whole point of the rent-seeking literature, pioneered by Ann Kruger? The whole point is that when people seek to capture these rents, the result is not only this familiar kind of efficiency loss the deadweight loss, but another kind of loss as well. That is, in the process of seeking rents, people use up scarce resources in trying to secure rents campaign contributions, bribes to government officials. This creates waste, as people spend money on directly unproductive activities. (DUP) They compete for the privilege of seeking rents. They produce not, nor do they satisfy: their labors are barren. These activities are lucrative from the point of view of the individual rent-seeker, but not the economy as a whole.

Let’s try another example.

Suppose we consider the market for tires in a small country. Assume a constant cost industry. Initially under perfect competition. Initially there are no import restrictions.

Consumers can buy domestic tires or foreign tires. The market for tires is as follows total supply Sp + F (Domestic Supply plus Imports).

Now, because of lobbying by local tire producer, the government bans imported tires. Supply drops back to merely S _D . Government also decrees no more firms can enter the industry. Price rises to P2, Q falls to Q ₂ . Now there will be rents in the system for the tire producers. The rents caused by the import ban are indicated by rectangle P ₂ ABP ₁ , and the efficiency loss by the triangle (ABC). Since no new firms can enter, these rents are permanent. Owners of capital in tire industry benefit at expense of consumers of tires. Government gains nothing.

These kinds of output restrictions, monopolies, import bans, have been common throughout the worlds, especially in poorer nations.

Examples:

• Monopolies granted to individuals:
  Indonesia- Flour, tires, cloves,
• Monopolies by government firms
  Spirits (much of Latin America)
  Electricity
• Import Restrictions
  Fish in Ghana
  Pharmaceutical: India Indonesia
  Autos- Latin America, Indonesia

Then, there are more pernicious forms of rent-seeking. Vehicle that is used for this form of rent-seeking has been a particular bane to some developing countries in Latin America is the cartel. A cartel is little more than a group of collaborating firms seeking to increase their revenues by working together and thus eliminating competition. In Latin America this form of rent-seeking was once associated with the 1930-1995 international coffee cartel. The coffee cartel 1930-1995 was largely run by Brazil and Columbia. Recently cartels have been more closely associated with drug production and smuggling operations, as well as the associated rent-seeking activities of bribery and protection. These cartels, in their quest for greater profits, pose significant security risks for citizens in several Latin American states and threaten the very stability of several governments. In Mexico, for example, well over BBC © Jan 2012 12,903 people had been killed in drug-related violence during the first nine months of 2011, rendering certain parts of northwester Mexico substantially too dangerous for tourism (Schwartz 1). The economic impact of the Latin American cartel is therefore not just in its effect on the price of illicit narcotics , but for its effects the stability required for strong markets. This in turn damages other sectors of the economy not directly involved in the initial rent-seeking exercise. These include tourism and industry, where foreign investment is often of critical importance. The Mexican case also demonstrates how forms of rent-seeking often complement each other: In 2007 it was reported that several high-level anti-drug official have been passing information to the cartels in exchange for millions of dollars in bribes.