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

Voice Exclusive Rivalry PRIVATE COMMON POOL PUBLIC Market Civil Society Collectives Government Picciotto's (1995) Framework

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: a)Elected politicians – election-votes b)Bureaucracy – jobs, salary 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) PSEPESTs (% of PSE) PERTs (% of PSE) Wheat Milk Eggs Beef Pork Data from late 1980’s

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 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