Rent-seeking refers to a concept in economics and public choice theory that seeks to increase the existing wealth’s share but without creating a new one. Rent-seeking’s interest is to obtain financial gain by manipulating the environment with economic activities.
A good example is where an industry or company politically lobbies the government to accept special grants, subsidies, or tariff protection. Note that it is this industry or company that stands to benefit if the government decides to take action towards that direction.
A Little More on What is Rent-Seeking
According to a philosopher and an economist Adam Smith, entities earn their income from profit, wages, and rent. Earning a profit involves risking capital. To earn wages, you first have to get yourself a paying job. The payment may be in the form of salary or wages.
However, out of the three sources of income, rent-seeking is the easiest way of earning income. You only need capital and the ability to make good use of resources in order to generate earnings. One of the best ways of doing this is to lend resources as well as capital to others.
When you compare sources of income in terms of work, rent-seeking involves less work. It is also less risky. So, this is why companies and individuals prefer this method of earning an income so that they can make good use of it. Rent-seeking may only be a problem where business entities increase their economic pie’s share, and they don’t work to increase its size. Note that in markets where economies are market-driven, competition related to rent-seeking is legal. However, where the competition involves things like corruption or bribery, then it becomes illegal. Rent-Seeking Activities include the following:
- Government subsidies
- Taxi licensing
In economics, the term ‘rent’ means receiving a payment that exceeds the costs of keeping an item in service or payment that surpasses the cost of producing a product. Note that rent-seeking does not in any way benefit the community. What it does is to redistribute resources from taxpayers. According to economists, it has negative effects on both society and the economy. It reduces the efficiency of the economy when it does the following:
- Cause inefficient resource allocation
- Reduce economic efficiency
- Cause loss of government revenues
- Cause potential national decline
- Reduce wealth creation or competition
- Increase income inequity
How it Works
Politicians formulate the laws that govern an industry or a company and also how the government distributes subsidies. If a company succeeds in passing laws that create barriers to entry or limit competition, the company will increase its available wealth’s shares. It means that the company will generate income without risking its capital and without being productive.
A company may decide to get a subsidy from the government for its product or lobby the government to increase its services’ tariff rates. The move will not lead to new wealth creation, and society will not benefit from it. It is a company that stands to gain if the government decides to act.
Let’s assume that feudal lord has a river passing through his land and decides to put a chain across it to bar the boats from passing. He then hires a collector to charge those who want to cross some fee before lowering the chain for them. Note that the collector nor the chain is not productive in any way. The reason is that there are no improvements that the feudal lord has made on the river. He is the only person benefiting because he is earning income from a river that people used to pass free of charge.