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When you study rent-seeking, a pattern emerges.

The prime route to unnatural rents is through supply restrictions. Again, I repeat, there are many kinds of supply restrictions.

  • Monopolization (or Oligopolization)
  • Import restrictions (tariffs, prohibition etc.)
  • Import licenses (to control the volume and composition of imports)
  • Licenses to enter a field (barbers, bakers, construction, etc.)
  • Entry restrictions in an industry (no foreign owned firms allowed)

Now, if you are a rent-seeker, where do you go to obtain such restrictions?

Answer: Mostly to governments (Federal, State or Local).

Politicians are like diapers. They need to be changed often – for the same reason.
(Will Rogers)

The rent-seeking literature maintains that governments are the main (not the only) source of non-natural rents. The claim is that government policies are responsible for most rents in most societies.

Aim of rent-seekers: convince the government to agree to one or another form of supply restriction.

Import controls are pervasive in both LDCs and DC s , but more so in LDC s . What kinds of imports controls? Again,

  • High tariffs
  • Quantative restrictions (Quotas)
  • Prohibition of imports
  • Import Licenses (can’t import certain products without license from government)

So, if government dispenses the favors, and if these favors are eagerly sought, it is natural that people compete to get these favors: they spend money and other resources to secure continued rents.

Competition for rents conferred by government policy uses up scarce resources.

Example: Lobbying expenses: Consider the opportunity cost of using a $800 /hour lawyer hired to lobby for supply restrictions.

Corruption world-wide issue [add new reading material]

In 19 th century, corruption was as rife in the U.S. as anywhere in the world: municipal governments and robber barons kept finding new ways to steal from taxpayers and investors. Many things brought this corruption down to more manageable level. What was most important factor? A free and independent press (see Corruption and Reform: Lessons from America's Economic History : Edward L. Glaeser and Claudia Goldin, University of Chicago Press).

Even today, different states have different degrees of tolerance of forms of rent-seeking. High tolerance: Massachusetts, Illinois , Maryland, New Jersey. Low tolerance: Minnesota, California, Oregon and North Carolina. How is this explained? You tell me.

Consider the costs of bribery that may be involved in chasing unnatural rents. Consider economic costs of excess capacity resulting from rent-seeking. Rent seekers always justify such restrictions in the higher national interests rather than their own narrow self-interests.

Now, of course, you can secure supply restrictions without government. Private cartels in U.S. and Europe in (1890-1940 IG Farben) shows this (oil, diamonds, sugar) even with the private cartels although governments had a hand, a protective one. But it is argued, the usual source of supply restriction is government, and is much easier to go to government to secure supply restrictions than by seeking collusion between private sector producers (why: cheating by private colluders is easier, the sanctions on cheating are less sever.

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Source:  OpenStax, Economic development for the 21st century. OpenStax CNX. Jun 05, 2015 Download for free at http://legacy.cnx.org/content/col11747/1.12
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