Chapter 3 : THEORY OF RENT SEEKING

1. Chapter 3 : THEORY OF RENT SEEKING

2. 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

3. 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

4. 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

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

7. 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

8. 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

9. Government: • Elected politicians – election-votes • Bureaucracy – jobs, salary Rent-seeking bureaucrats: New policy – new jobs, security Coalitions with industry – RR wheat + CFIA Rent-seeking – Always bad? • Predominant view – RS => misallocation • No distortions – competitive markets • Waste of resources • Political-economic resource transfers • Benefits to rent seeking Effective intervention requires information RS – source of information on social needs (social welfare function) • Potential efficiency gain • “Second Best” solution

10. 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

11. 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

12. PERTS/PESTS (OECD, 2000) - Data from late 1980’s

14. 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

15. 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

16. 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