Rent Seeking in Economics - Essay Example

Rent Seeking in Economics Instead of earning profits by going through the process of a business transaction, rent seeking in economics happens when a person or a business organization aims to earn additional income by manipulating or exploiting the available economic or political resources (Chowdhury, pp. 25 - 34). A good example of rent seeking is when a businessman uses his political power to gain a special business monopoly right over a particular industry. This is one of the best ways to protect the business from having free trade competition. It is also possible for businessmen to bribe government officials in order to win tariff protection during a serious economic crisis. In reality, rent seeking in economics can happen in so many ways. However, rent seeking based on the card game experiment that my team (white) has conducted was not possible simply because of the absence of economic and/or political manipulation. First of all, the local government’s decision to allocate the winner of the communications license randomly from the entire applications they received each day narrows down the chances wherein our team could win the lottery. Since each of the four teams is legally permitted to submit up to 13 applications each day, the probability that the number of total applications gathered from the four groups increases. For example: Given that each team will submit the maximum number of 13 applications during the first round, the total number of applications that the local government would receive will be 52 [13 x 4]. Since our team submitted a maximum of 13 applications during the first round, our team only had 25% chances wherein one of our applications would be randomly selected [(13 / 52) x 100]. Let us assume that our team submitted a maximum of 13 applications during the first round whereas each of the other teams would submit only a 2 applications each. It means that the total applications that the local government would receive will be 19 [13 + 2 + 2 + 2]. Given the said situation, the probability that our team will be randomly selected during the lottery draw increases by up to 68.4% [(13 / 19) X 100]. Despite the significant increase in the chances wherein our team’s application would be randomly selected, this does not guarantee that our application for the local government communication license will be selected since our team does not have the privilege to manipulate the decision-making process of the local government particularly when it comes to awarding who contract. Another point of argument that makes rent seeking impossible is the added fixed cost imposed in each application. Since the total costs of card played during the first round is $3,000 regardless of whether our team wins the license or not, the chances wherein our team would gamble in the application for the local government communication license decreases. In fact, even if our team decided to increase the number of cards we play for the price of $3,000 each, the probability that our team’s application would be randomly selected remains narrow. Upon analyzing the given case scenario, it is clear that rent seeking in economics happens because of the imperfection within the economic and political markets (Pasour, p. 124). It simply means that the presence of political and economic corruption promotes the strengthening of rent-seeking behavior among the local and international business people. On the contrary, the chances wherein the market will be dictated freely by the movements of supply and demand increases in case of the absence of lobbying, bribery, and political corruption. In a free market economy, movements in supply and demand dictate the market prices of goods and services. In the absence of a direct government regulation, sellers will have to encourage the buyers to purchase the products and services they offer to the public by making the market price more attractive. Because of the presence of political and economic corruption, it is not easy to control unfair business practices. It is difficult to abolish the presence of rent-seeking behavior because of self-interests among the government officials and the business people within a market economy. In line with this, government officials who have the political power to either grant tax protection or give monopoly right to a large corporation is often tempted to accept irresistible offers or bribes coming from the big-time players in the business world. As a way of earning more money, business people would always grab the chance of becoming protected by the government officials whenever possible. Since the general public is the one who votes for the members of the government officials, rent seeking behavior in economics terms does not always occur as a collective decision-making process but a larger context of public choice. This makes rent-seeking behavior a major public choice problem. Looking back at the card game experiment our team had in class, the practice of rent seeking behavior is not possible since the experimental case study has dictated all the conditions behind the game. No matter how hard we try to manipulate the game, there is no other way our team could win the contract but luck. In case our team gets lucky enough to be randomly selected by the local government, we win the contract. If not, our team will always have to pay the paper work and legal fees even without winning the license. In other words, the strict rules behind the game makes it impossible for our group members to even think of other ways to manipulate or increase the probability our team would win the local government communications license. The same rules apply to the real world. If a country wants to abolish the practice of rent seeking behavior, the government officials will have to be firm in destroying the practice of corruption. This can be done by increasing the penalty imposed to government officials who will be proven to have willingly participated in the practice of political corruption. Only then would the local and international business people would be more afraid of violating the law. *** End *** Total Number of Words: 1,005 References Chowdhury, Faizul Latif. Corrupt Bureaucracy and Privatization of Tax Enforcement (A Rent Seeking Bureaucracy ed.). Pathak Shamabesh, Dhaka, 2006. Pasour, E.C. "The Review of Austrian Economics." 7 - 11 August 1983. Rent Seeking: Some Conceptual Problems and Implications. 22 September 2010 . Read More