Question

Question 4 [14]Explain the meaning of the term ‘rent seeking’ and illustrate graphically how it could undermine efficiency in the economy.

Subject: Governmental economics 20A

Answer 1

rent seeking is the strategy to manipulate the public policies in order to increase the personal profits at expense of others.

Below is the example of a competitive market where the equilibrium occurs when MC = AC = P (at point E).

Optimal quantity = Qc

However, a monoopolist will be selling the good where MR = MC. This occurs at point E1. Monopolist quantity = Qm and Price charged = Pm

TR of monopolist = Area PmaQmO

TC of monopolist = Area AC1E1QmO

Monopolist profit = Area PmaE1AC1 (shared region)

However, in perfect competition, there are no economic profits

In monopoly, where the producers are trying to maximize profits and restrict the quantity, leads to inefficiency in the market.

The inefficiency = Area aEE1

Now, if firms seek to behave as the rent seekers, then inefficient would be more as discussed earlier because of the depletion of increased resources to earn some profits. The government officials would charge a high price from the monopolist to restrict the quantity at Qm. Such high charging increases the monoplist cost and leads to inefficiency. The lobbying process may lead to higher inefficiency = Area PmaEAC1 (Rectangle + Triangle)

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