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Chapter 3 : THEORY OF RENT SEEKING Introduction • Agricultural Policy • Definite course of action • Decision among alternative – Large budget costs – Surplus products – Trade wars • Debate: proper role of Government – Cochrane – Yes - good society – Tweeten – No - distortion • Should government be involved? – Why is government involved? • Theory of public choice – – – – Premise: self-interest of government Objective: Retain power - votes Interventions: taxes, subsidies Interest groups – influence – rent seeking • Political market – supply and demand – Choices that are economically inefficient – Politically efficient Why does policy exist? 1) Market failure – – – – – externalities benefits/costs not reflected in prices inefficient allocation of resources sub-optimal solution Intervention: • market equilibrium closer to social optimum • Rational basis for intervention? – Ronald Coase (1930’s) • property rights is the problem • Create rights & the market will work 2) Robin Boadway (1997) – 3 reasons • Efficiency – externality argument • Stabilization • distribution • Distribution and rent-seeking – – – – Redistributive government, prey to rent-seeking Rent-seeking – active redistribution Incentive to organize and lobby government e.g. SM-5, CPR Institutions and goods • Institutions help define the nature of goods and the rationale for intervention • 3 types of goods • private • public • common access • Characteristics – a) form, location, time – b) excludability • defined property rights • enforcement – c) rivalry • Government intervention – change the nature of a good • • • • E.g. plant genetics – Bill C-20 Plant Breeders’ Rights Act (1990) Bill C-91 (patent protection) (1993) Drug Patent Act 3.3 Goods & Services in the Economy QUESTION: When is it more efficient for the government to provide goods and services instead of the market? When is it efficient to intervene? The Alterna tives: 1 The market 2 Government 3 Civil society; participatory sector ANSWER: It depends on the type of goods being provided, and their characteristics. 1 Rivalry - divisibility 2 Exclusivity - excludabili ty 3 Voice Types of Goods: 1 Private 2 Public 3 Common Pool Π common property and open access goods Picciotto's (1995) Framework Government PUBLIC Exclusive Voice COMMON POOL PRIVATE Market Rivalry Civil Society Collectives Public Choice & Rent Seeking Policy process - 3 main groups: – Government & bureaucracy – Interest groups – Tax payers Each group has interests (increase benefits) Economic Theory of the Consumer Assumption: individuals max U – self-interest Theory of Public Choice - Seeks to explain policy choices - about voting behaviour and politics U(RS) = F(political outcomes) U(RS) = F[Income(politics)] U(G) = g(voting by RS) Rent seeking system: Interest groups influence government Government tries to influence interest groups What is rent-seeking activity? Activity – actions individual or group Purpose: obtain favourable outcomes or avoid unfavourable outcomes Activities that may lead to policies that facilitate the transfer of economic rents from one group to another in society Positive or negative impacts resource allocation and efficiency Government: Elected politicians – election-votes Bureaucracy – jobs, salary a) b) Rent-seeking bureaucrats: New policy – new jobs, security Coalitions with industry – RR wheat + CFIA Rent-seeking – Always bad? a) Predominant view – RS => misallocation • No distortions – competitive markets • Waste of resources • Political-economic resource transfers b) Benefits to rent seeking Effective intervention requires information RS – source of information on social needs (social welfare function) - Potential efficiency gain “Second Best” solution Examples of rent-seeking • Supply management boards – ensured high tariffs are imposed although contrary to GATT rules • Canadian Pacific Railway – lobbied for monopoly status in early years – blocked the construction of competing rail lines • Common Agricultural Policy (EU) – Generous grain production subsidies – Import tariffs – Export subsidies • US Sugar Lobby – Tariffs – quotas Categories of rent seeking (Rausser) • Political economic-seeking transfers (PESTs) – Purely an economic transfer rent seeking behaviour • Political economic-resource transaction (PERTs) – Attempts to correct market distortions • Government: – Balance PERTS/PESTS PERTS/PESTS (OECD, 2000) PSE PESTs PERTs (% of PSE) (% of PSE) Wheat 33 79.2 20.8 Milk 71.2 94 6 Eggs 26.6 75.8 24.2 Beef 18 26.7 73.3 Pork 16.6 16.3 83.7 - Data from late 1980’s Canada: Support to Agriculture ($CA Billions) Producer Support ($B) PSE (%) Consumer Support ($B) Total Support ($B) Transfers from consumers Transfers from taxpayers Total Support/GDP (%) 1986-88 8.05 36 - 3.79 10.01 4.14 5.88 1.80 2004-06 7.96 22 - 3.63 10.82 3.63 7.19 0.79 2006 8.53 23 - 4.23 11.46 4.23 7.23 0.80 United States: Support to Agriculture ($US Billions) Producer Support ($B) PSE (%) Consumer Support ($B) Total Support ($B) Transfers from consumers Transfers from taxpayers Total Support/GDP (%) 1986-88 36.8 22 -3.0 64.1 14.8 50.9 1.35 2004-06 38.1 14 19.6 101.5 10.2 92.8 .82 2006 29.3 11 25.9 96.9 5.7 92 .73 Other Countries PSEΥs(2002-06) New Zealand Π 3% Australia Π 5% EU Π 32% Japan Π 55% Iceland Π 75% OECD, Paris: Agricultural Poli cies in OECD Countries: Monitoring and Evaluation (2007) PERTS vs PEST OUTCOMES • PEST’s – Commodities with inelastic demand and supply – Supply managed commodities • PERT’s – Commodities traded in the world market – Elastic demand • US - PSE – increased 1997-2000 - Support levels built into the 1996 Farm Bill Rent Seeking – conflicts & coalitions • Multiple rent-seeking groups – Rent-seeking conflicts – farmers vs. consumers vs processors – Farmers vs. Environmentalists • Input subsidies - reduced GHG emissions • Coalitions & logrolling – Multiple groups – common objective • • • • • Commodity groups Farm organizations Input manufacturers Grain handlers Consumers • Common goal: Increased farm output Lobby Groups • Farm organizations – Canadian Federation of Agr. (CFA) • umbrella group – National farmers Union (NFU) • Individual membership – commodity groups • lobby government directly – Western Canadian Wheat Growers Assoc – Canadian Cattlemen’s Association – Dairy Farmers of Canada – provincial groups • UPA • Dairy farmers of Ontario • Sask. Organic Directorate • Private companies • Government problem – Who speaks for Canada? – Free trade vs protection – Consumer protection vs freedom to farm