Public Choice In a Representative Democracy

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

V. Rent seeking

a) The basic model

Difference between rents and profits:

Entrepreneur profit seeking,

Rent seeking is an activity to generate income without efforts on markets for goods and services. These cause socially wasted expenditures (social costs):

© Freytag 2013

• expenditures of potential recipients,

• expenditures of third parties suffering from the successful rent-seeking,

• efforts of governments associated with rent

51

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Price

Pm

Pc

Public Choice

Figure 4.9: The social costs of monopoly with rent seeking

MC

Quantity

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

The basic rent-seeking model with a fixed number of players

(1)

(2)

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

The basic model with diminishing or constant returns, r ≤ 1.

(5)

n

(7)

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

b) Rent seeking through regulation

The normative grounds for regulation are cases of market failure (chapter 2).

Market failure is regularly combated by taxes, subsidies and regulation.

In addition, one finds many cases of regulation not justified by market failure (state failure).

A utility maximising government will set a price (price regulation) so that the marginal gain in support by the rent-seeking group equals the marginal loss in supportpport by the consumers.

Therefore, the main beneficiaries of regulation are the regulated firms (plus the regulatory office (see section 4.f).

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

One interesting implication is that the prices are between competitive prices and pure monopoly prices (as the latter would increase the loss in support by consumers above the gain in support by the very industry).

Valuable explanation of agriculture protection and taxicab regulation around the world.

Environmental regulation can be explained by this theory, e.g. pesticide regulation and the number of listed species by individual state in the Endangered Species Act in the US.

Becker (1983, 1985) shows that the rent seeking process can be reverted. If the costs for the consumers (or the suffering group) increase, their rent seeking activities also increase, and the government starts a new calculus.

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

c) Rent seeking through tariffs and quotas

To explain rent seeking in international trade, the Ricardo- Viner-model with specific factors of production is adequate.

All factors employed in the country’s sectors with comparative disadvantages lose by a change from autarky to international trade.

Therefore, the whole industry invests into rent-seeking activities. The calculus of the government includes again the marginal gains and losses in support by the industry and the consumers plus the effects of certain instruments of protection on the international trade policy agenda.

As quotas have always been forbidden, VERs were introduced, giving the exporting country the chance to get the rents; after 1994, VERs also have been prohibited.

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

Table 4.2: Estimates of the welfare losses from rent seeking.

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

1GCP=gross corporate product

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

d) The logic of collective action

How can we explain that some interest groups are more successful than others in a) organising themselves and b) obtaining rents in politics? Both questions can be answered with:

• rent-seeking as collective (club) good free riders,

• opportunity cost of rent seeking.

In addition, interest group formation can be enhanced by:

• additional private goods offered by the group,

• obligations to join a group,

• different size of group members.