Holt 7525-9 S15_IT

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Rent Seeking
Quantity
A monopoly is in a better position to earn economic profit than is a competitive firm. If the
government takes action that gives a competitive firm a monopoly position (or even some
protection from competition), that action will benefit the firm. Will a firm seek such benefits from
the government? If so, the firm is engaged in a socially wasteful practice called rent seeking.
Rent seeking – when people use resources to manipulate public policy in order to redistribute
income to themselves from others.
Rent seeking may take the form of lobbying, campaign contributions, public relations efforts, etc.
The rent seeking is socially wasteful because limited resources are being used, not to produce
goods and services, but to attempt to redistribute income. If the rent seeking is successful, the
government restraints on competition (licensing requirements, trade restrictions, etc.) are also
likely to be economically inefficient.
Example 10: Widgetworks Co. is facing greater competition from imported widgets. Widgetworks
calculates that a 15% tariff on imported widgets would increase Widgetworks’ annual profits by
$100 million. Widgetworks will find it beneficial to spend millions of dollars on lobbying efforts,
campaign contributions, public relations efforts, etc. if this will result in the government imposing a
15% tariff on imported widgets. Not only is the rent seeking by Widgetworks a socially wasteful
use of resources, but if it successfully leads to a tariff, the tariff will also be economically
inefficient (see Chapter 16).
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
MR
22 - 7 Monopoly