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Thursday, April 11, 2013

 

Rent Seeking

 

            In today’s political climate, special interest groups and “lobbying” are a constant topic of discussion. Many special interest groups or individuals attempt to use government to provide them with special privileges in the market. Economists refer to this activity as “rent seeking.” In a marketplace, competition provides incentive for other players to enter the market in order to reap the same benefits, thus lowering the cost of goods and services over time. With the ability to use force, Politicians are sought out by individuals in the market in an attempt to keep others out of the market so that they may eliminate competition and see higher profits for themselves. This, of course, is harmful to consumers.

Most often, rent seeking takes the form of occupational licensure; where government limits the number of entries into the market below the level of competition there would otherwise be in a free/competitive market. There are literally thousands of examples of rent seeking in the United States alone. A good example right here in Colorado would be the monopoly on Taxi Cab drivers in the city of Denver. For nearly 50 years, the city had only three taxi cab companies. The city, through the power to permit licenses, denied entry to any companies that made an attempt to enter the market. This placed the three existing companies at a competitive advantage, and left the consumers paying higher prices.

When companies attempted to enter the taxi business, the city would deny them entry because they would take business away from the existing companies and that would be “unnecessary.” This type of arbitrary decision making is obviously harmful to the market process in various ways. Not only are competitors forced to stay out of the market, but consumers are stuck with higher prices. Also, productive resources are spent by the special interest groups on political affairs rather than in the market where they would benefit consumers. The problems that rent seeking creates will continue as long as government has the power to force potential players out of the market.

The problem is in concentrated benefits and dispersed costs. Existing businesses have an incentive to “seek rent” from government due to the increased profits that are at stake for them. Therefore, they are willing to spend a lot of time and resources in an effort to convince legislators to pass laws that work in their favor. The rest of the population, mainly consumers, have hardly any knowledge of these events, nor do they see much incentive to spend a large amount of time and recourses fighting their case just to save $20 on their next cab ride in Denver Colorado, which most consumers will probably never notice. Most people are unwilling to spend hundreds, perhaps thousands, of dollars just to save $20. This is not a problem; it’s great that people act rationally. The problem is that we have sanctioned government’s ability to use force in the market.

The only solution to this problem is to remove the government’s power to influence the market. As long as the government’s power to arbitrarily choose the success of certain players in the market is legitimized by our society, then individuals will continue to spend time and resources seeking that power, instead of providing for consumers in a competitive market. If government did not have the power to use force in such a harmful way, then the market process would provide consumers with products and services at the lowest cost, while supplying incentives to innovate and spend more time and resources doing so, rather than seeking rent from the legislators and the political process.

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