Question

Rent seeking is common problem in most countries and Fiji is no exemption. According to Graborsky and Larmour (2000), rent seeking is a form of corruption and is detectable in many forms like bribery, extortion, fraud, embezzlement, etc. For economists, rent seeking creates deadweight losses which incurs welfare costs. Using graphs discuss the impact of rent seeking in the case of monopolies.

Answer 1

Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The theory of monopoly states that a monopolist earns super normal profits by restricting output and hence increasing prices above its perfectly competitive level.

As per the below diagram,When price rises, a transfer of income from consumers (who continue to consume the good) to the monopolist (measured by area A in the diagram) occurs. A further loss, known as the dead weight loss (shaded triangle), is incurred by people who stop buying the product. This refers to the consumer surplus that would have been generated by consumption of the good between Qm and Qpc, a quantity now neither produced nor consumed. However, this analysis hinges on the assumption of the monopoly being created and maintained costlessly. In fact, the deadweight loss underestimates the social cost of monopoly as the existence of an opportunity to earn monopoly profit (or rent) attracts resources into efforts to obtain and maintain 2 of 4 monopolies. This activity is known as rent seeking. Furthermore, resources may be expended wastefully by opponents to the creation of a monopoly.