Public Sector Economics

In Class Exercise Four - Rent Seeking

1.  Explain why “rent seeking” by special interest groups is considered wasteful by most economists, while “profit seeking” in the marketplace is not considered wasteful.  What’s the difference?  How does this relate to Tullock's definition of rent seeking?

2.  a. Mainstream economics shows economic profit (rent) graphically - and then explains how and why it is competed away in a "perfectly competitive market."  Graphically and in words explain this.

b.  Now relate your answer to #2 above to "rent seeking."

3.  Besides the Super Bowl example given in class, can you think of another example of potentially "socially harmful" rent seeking that does not happen because of government policy?

4.  When coming up with the theory of rent seeking, Tullock used the standard mainstream model of monopoly (as it compares to the model of perfect competition).  He showed that the potential cost to society of a monopoly (government granted) was not simply the "welfare or deadweight" loss - but also the cost associated with rent seeking.  Explain this additional cost (both in words and graphically) -- and why it is a "cost" to society.  Does anyone benefit from this particular form of rent seeking? If so, how and why?

5.  What does "rent protection" mean?  Give an example besides the one given in class (i.e., the excise tax) and then explain what the cost of the rent protection would include.

6.  According to Pasour (and others) - mainstream monopoly theory is wrong.  A monopolist that comes about in the market due to innovation is NOT creating any kind of welfare loss -- explain why - both graphically and in words.

7.  What does Pasour mean when he says the "rent seeking waste is a matter of opinion depending on one's view of the appropriate role of the state, which must ultimately be determined on the basis of ethics rather than economic theory."?  Example?

8.  If one believes it is morally OK for the state to redistribute wealth -- why might they still object to rent-seeking?

9.  Discuss a couple of ways the rules of the game could be changed in order to decrease rent-seeking in society.  Be sure to explain why rent-seeking would decrease or go away.

10.  Do you have any other questions on this material?