-
Notifications
You must be signed in to change notification settings - Fork 1
/
Untitled.Rmd
418 lines (278 loc) · 12.3 KB
/
Untitled.Rmd
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302
303
304
305
306
307
308
309
310
311
312
313
314
315
316
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
360
361
362
363
364
365
366
367
368
369
370
371
372
373
374
375
376
377
378
379
380
381
382
383
384
385
386
387
388
389
390
391
392
393
394
395
396
397
398
399
400
401
402
403
404
405
406
407
408
409
410
411
412
413
414
415
416
417
418
# Recall: Ricardo on Rent in the Long Run
.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/2lfmrgfcrswf9s4/ricardo2.jpg?raw=1)
David Ricardo
1772-1823
]
]
.right-column[
- In Ricardo's view, *land* was the fixed factor
- Marginal product of land would fall to 0, requiring more and more labor and capital to scrape off marginal land
- Profits to capital fall to 0
- Wages to laborers fall to subsistence level
- Rents to land skyrocket due to land being the fixed factor
- .shout[Ricardian rents] describe these excess returns due to scarcity
]
---
# Economic Rents Induce Rent-Seeking
.pull-left[
.center[
![](https://www.dropbox.com/s/21v476wphty3f0i/prize.jpg?raw=1)
]
]
.pull-right[
- Think of an .shout[economic rent] as a "prize," the payment a person receives for a good above its opportunity cost
- Creating rents creates competition for the rents, causing people to invest resources in .shout[rent-seeking]
- The cost of the rent is not just the rent itself, but the resources invested in rent-seeking!
]
---
# Government Intervention Creates Rents I
.pull-left[
.center[
![](https://www.dropbox.com/s/obqxaf2tz2se3jh/rents.jpg?raw=1)
]
]
.pull-right[
- Political authorities intervene in markets in various ways that benefit some groups at the expense of everyone else
- subsidies to groups (often producers)
- regulation of industries
- tariffs, quotas, and special exemptions from these
- tax breaks and loopholes
- conferring monopoly and other privileges
- These interventions create .shout[economic rents] for their beneficiaries by reducing competition
- This is a transfer of wealth from consumers/taxpayers to politically-favored groups
]
---
# Government Intervention Creates Rent-*Seeking*
.pull-left[
.center[
![](https://www.dropbox.com/s/obqxaf2tz2se3jh/rents.jpg?raw=1)
]
]
.pull-right[
- The transfer is not the worst of it
- The real problem is .whisper[you cannot give away money for free even if you tried!]
- The promise of earning a rent breeds **competition over the rents** (.shout[rent-seeking])
]
---
# Rent-Seeking I
.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/qlqf5lq2rfzevjc/annekreuger.jpg?raw=1)
Anne Kreuger
1934-
]
]
.right-column[
> "In many market-oriented economies, government restrictions upon economic activity are pervasive facts of life. These restrictions give rise to rents of a variety of forms, and people often compete for the rents. Sometimes, such competition is perfectly legal. In other instances, rent seeking takes other forms, such as bribery, corruption, smuggling, and black markets."
> "**When quantitative restrictions are imposed upon and effectively constrain imports, an import license is a valuable commodity**...It has always been recognized that there are some costs associated with licensing: paperwork, the time spent by entrepreneurs in obtaining their licenses, the cost of the administrative apparatus necessary to issue licenses, and so on. Here, the argument is carried one step further: **in many circumstances resources are devoted to competing for those licenses**," (p.848).
]
.source[Kreuger, Anne, (1974), "The Political Economy of the Rent-Seeking Society," *American Economic Review* 84(4): 833-850]
---
# Rent-Seeking II
.center[
![](https://www.dropbox.com/s/nk8we15tjlszil0/kreugerindia.png?raw=1)
]
.source[Kreuger, Anne, (1974), "The Political Economy of the Rent-Seeking Society," *American Economic Review* 84(4): 833-850]
---
# Rent-Seeking: The Ugly of Monopoly
.pull-left[
```{r, fig.retina=3}
CS_2<-tibble(x=c(0,0,4),
y=c(10,6,6))
dwl<-tibble(x=c(4,4,8),
y=c(6,2,2))
mr<-function(x){10-2*x}
#line_colors <- c("Supply" = "red", "Demand" = "blue")
#surplus_colors <-c("Consumer" = "blue", "Producer" = "red")
ggplot(data.frame(x=c(0,10)), aes(x=x))+
# surpluses
geom_polygon(data=CS_2, aes(x=x,y=y), fill="blue",alpha=0.5)+
geom_rect(xmin=0,xmax=4,ymin=2,ymax=6,fill="green", alpha=0.25)+ #profit
geom_polygon(data=dwl, aes(x=x,y=y), fill="black",alpha=0.5)+ #dwl
# surplus labels
geom_label(aes(x=1.5, y= 4), label="Profit", color="green", size =5)+
geom_label(aes(x=1.5, y= 7.5), label="CS", color="blue", size =5)+
geom_label(aes(x=5.5, y= 3.5), label="DWL", color="black", size =5)+
# lines
stat_function(fun=demand, geom="line", size=2, color = "blue")+
geom_label(aes(x=9,y=demand(9)), color = "blue", label="Demand", size = 5)+
stat_function(fun=mr, geom="line", size=2, color = "purple")+
geom_label(aes(x=4.5,y=mr(4.5)), color = "purple", label=expression(MR(q)), size = 5)+
stat_function(fun=mc, geom="line", size=2, color = "red")+
geom_label(aes(x=6,y=mc(6)), color = "red", label=expression(MC(q)==AC(q)), size = 5)+
# optimal dots
geom_segment(x=0, xend=4, y=6, yend=6, size=1, linetype="dotted")+
geom_segment(x=8, xend=8, y=0, yend=2, size=1, linetype="dotted")+
geom_segment(x=4, xend=4, y=0, yend=6, size=1, linetype="dotted")+
geom_point(x=4,y=6, size=3)+
geom_text(x=4.5,y=6.5,label=expression(paste("(",q^o,", ",p^o,")")), size=5)+
scale_x_continuous(breaks=seq(0,10,1),
limits=c(0,10),
expand=expand_scale(mult=c(0,0.1)))+
scale_y_continuous(breaks=seq(0,10,1),
limits=c(0,10),
labels=scales::dollar,
expand=expand_scale(mult=c(0,0.1)))+
guides(fill=F)+
labs(x = "Quantity",
y = "Price",
caption = expression(paste("Demand: ", p(q)==10-q, ", Cost: ", C(q)==2*q)))+
theme_classic(base_family = "Fira Sans Condensed", base_size=20)
```
]
.pull-right[
- The .green[monopoly profits] earned with market power are an .shout[economic rent]
- This is the "prize" of market power
- What if the market power is earned through political lobbying for an anti-competitive regulation?
]
---
# Rent-Seeking: The Ugly of Monopoly
.pull-left[
```{r, fig.retina=3}
CS_2<-tibble(x=c(0,0,4),
y=c(10,6,6))
dwl<-tibble(x=c(4,4,8),
y=c(6,2,2))
mr<-function(x){10-2*x}
#line_colors <- c("Supply" = "red", "Demand" = "blue")
#surplus_colors <-c("Consumer" = "blue", "Producer" = "red")
ggplot(data.frame(x=c(0,10)), aes(x=x))+
# surpluses
geom_polygon(data=CS_2, aes(x=x,y=y), fill="blue",alpha=0.5)+
geom_rect(xmin=0,xmax=4,ymin=2,ymax=6,fill="black", alpha=0.25)+ #profit
geom_polygon(data=dwl, aes(x=x,y=y), fill="black",alpha=0.5)+ #dwl
# surplus labels
geom_label(aes(x=1.5, y= 4), label="Rent-Seeking", color="black", size =5)+
geom_label(aes(x=1.5, y= 7.5), label="CS", color="blue", size =5)+
geom_label(aes(x=5.5, y= 3.5), label="DWL", color="black", size =5)+
# lines
stat_function(fun=demand, geom="line", size=2, color = "blue")+
geom_label(aes(x=9,y=demand(9)), color = "blue", label="Demand", size = 5)+
stat_function(fun=mr, geom="line", size=2, color = "purple")+
geom_label(aes(x=4.5,y=mr(4.5)), color = "purple", label=expression(MR(q)), size = 5)+
stat_function(fun=mc, geom="line", size=2, color = "red")+
geom_label(aes(x=6,y=mc(6)), color = "red", label=expression(MC(q)==AC(q)), size = 5)+
# optimal dots
geom_segment(x=0, xend=4, y=6, yend=6, size=1, linetype="dotted")+
geom_segment(x=8, xend=8, y=0, yend=2, size=1, linetype="dotted")+
geom_segment(x=4, xend=4, y=0, yend=6, size=1, linetype="dotted")+
geom_point(x=4,y=6, size=3)+
geom_text(x=4.5,y=6.5,label=expression(paste("(",q^o,", ",p^o,")")), size=5)+
scale_x_continuous(breaks=seq(0,10,1),
limits=c(0,10),
expand=expand_scale(mult=c(0,0.1)))+
scale_y_continuous(breaks=seq(0,10,1),
limits=c(0,10),
labels=scales::dollar,
expand=expand_scale(mult=c(0,0.1)))+
guides(fill=F)+
labs(x = "Quantity",
y = "Price",
caption = expression(paste("Demand: ", p(q)==10-q, ", Cost: ", C(q)==2*q)))+
theme_classic(base_family = "Fira Sans Condensed", base_size=20)
```
]
.pull-right[
- The .green[monopoly profits] earned with market power are an .shout[economic rent]
- This is the "prize" of market power
- What if the market power is earned through political lobbying for an anti-competitive regulation?
- Firm(s) willing to invest resources into the "competitive market" of creating and maintaining economic rents
- **Total loss to society** $= \text{DWL}+\text{Rent-seeking (of all competitors!)}$
]
---
# Rent-Seeking III
.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/dxqyaa7xr9nsfj0/tullock2.jpg?raw=1)
Gordon Tullock
1922-2014
]
]
.right-column[
> "The rectangle to the left of the [Deadweight loss] triangle is the income transfer that a successful monopolist can extort from the customers. **Surely we should expect that with a prize of this size dangling before our eyes, potential monopolists would be willing to invest large resources in the activity of monopolizing. In fact the investment that could be profitably made in forming a monopoly would be larger than this rectangle, since it represents merely the income transfer**," (p.231).
]
.source[Tullock, Gordon, (1967), "The Welfare Cost of Tariffs, Monopolies, and Theft," *Western Economic Journal* 5(3): 224-232.]
---
# Rent-Seeking IV
.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/dxqyaa7xr9nsfj0/tullock2.jpg?raw=1)
Gordon Tullock
1922-2014
]
]
.right-column[
> "Entrepreneurs should be willing to invest resources in attempts to form a monopoly until the marginal cost equals the properly discounted return. The potential customers would also be interested in preventing the transfer and should be willing to make large investments to that end. Once the monopoly is formed, continual efforts to either break the monopoly or muscle into it would be predictable. Here again considerable resources might be invested. The holders of the monopoly, on the other hand, would be willing to put quite sizable sums into the defense of their power to receive these transfers," (p.231).
]
.source[Tullock, Gordon, (1967), "The Welfare Cost of Tariffs, Monopolies, and Theft," *Western Economic Journal* 5(3): 224-232.]
---
# Rent-Seeking V
.pull-left[
.center[
![](https://www.dropbox.com/s/q26m7vu26c538mf/taxi.png?raw=1)
]
]
.pull-right[
![](https://www.dropbox.com/s/3zce4dsvz4p4ni9/taximedallion2.jpg?raw=1)
]
---
# A Microcosm of the Political Economy of Creative Destruction I
.center[
![](https://www.dropbox.com/s/bp51o8pg4qk23om/uberlyfttaxis.png?raw=1)
]
---
# A Microcosm of the Political Economy of Creative Destruction II
.pull-left[
.center[
![](https://www.dropbox.com/s/uod84u4komffxar/uberprotest1.jpg?raw=1)
]
]
.pull-right[
.center[
![](https://www.dropbox.com/s/1wz9wy2ebhb9pan/uberprotest2.jpg?raw=1)
]
]
---
# Another Mundane(?) Example
.center[
![](https://www.dropbox.com/s/31qaz4yi2kucq25/milkrentseeking.png?raw=1)
Source: [*New York Times* (Feb 13, 2017)](https://www.nytimes.com/2017/02/13/well/eat/got-almond-milk-dairy-farms-protest-milk-label-on-nondairy-drinks.html)
]
---
# If You Look at the World Long Enough...
.center[
![](https://www.dropbox.com/s/d3ryphbj3j7jtt8/rentseekingeverywhere.jpg?raw=1)
]
---
# Regulation has a Dark Side
.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/9s3qzw1m3rrl9sy/stigler.png?raw=1)
George Stigler
1911-1991
Economics Nobel 1982
]
]
.right-column[
> "[A]s a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits," (p.3).
]
.source[Stigler, George J, (1971), "The Theory of Economic Regulation," *Bell Journal of Economics and Management Science* 3:3-21]
---
# Private Rent-Seeking I
.center[
![](https://www.dropbox.com/s/ffzve1pxg2cb9er/reivers.jpg?raw=1)
*The Rievers* (1969) based on William Faulkner’s (1962) book
]
---
# Private Rent-Seeking II
.center[
![](https://www.dropbox.com/s/k9qdtxu1194xczq/rhinecastle.png?raw=1)
![](https://www.dropbox.com/s/a2eg34wttaahssl/rhinetolls.jpg?raw=1)
]
---
# Private Rent-Seeking III
<iframe width="560" height="315" src="https://www.youtube.com/embed/NanVFWoNtTA" frameborder="0" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
---
- If you want to learn more specifically how political incentives are aligned in a democracy like the United States, take my Public Economics course next semester!