Question

Explain the meaning of the term rent seeking and illustrate graphically how it could undermine efficiency in the economy

Answer 1

It shall be noted that Rent seeking is an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. An example of rent seeking is when a company lobbies the government for foreign company entry-restrictions, grants, subsidies, or tariff protection. Businesses can lobby the government for help in the areas of competition, special subsidies, grants, and tariff protection. If a business succeeds in getting laws passed to limit their competition or create barriers to entry for others it can achieve economic rents without any added productivity or capital at risk.

Rent seeking can disrupt market efficiencies and create pricing disadvantages for market participants. It has been known to cause limited competition and high barriers to entry. Those that benefit from successful rent seeking obtain added economic rents without any added obligations. This can potentially create unfair advantages, specifically providing wealth to certain businesses that leads to greater market share at the detriment of competitors.

Thus, the rent-seeking results in dead-weight loss and undermine the efficiency in the economy.