Question

Once consequence of income inequality is that high income individuals might engage in rent-seeking behavior. What is rent-seeking behavior and why is it bad for an economy?

Answer 1

Rent seeking behaviour can be defined as an activity in which one person or entity increases its share of wealth and in return doesn’t add or create new wealth in the economy. For example -

When an entity employs its resources to acquire an unwarranted monetary gain from external sources ,  be it directly or indirectly, without giving anything in return to them or the society, it is termed as rent-seeking.

Rent - seeking is bad for economy as it has a cost that an economy has to pay. Rent - seeking forces the economy to operate at inefficient level as this practice largely leads to creation of cartels and monopoly. As we know , with such market forms, there is a welfare cost attached in the form of lost surplus ( of both consumers and producers) , known as deadweight loss. Thus, Rent-seeking behaviour leads to reduced economic efficiency through inefficient allocation of resources, lower creation of  wealth, reduced  government revenue, increased income inequality, and decline in a nation’s GDP