What is Rent-Seeking in Economics?

Rent-seeking refers to a concept in economics and public choice theory that seeks to increase the existing wealths share but without creating a new one. Rent-seekings 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.

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How is Rent-Seeking Used? 

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 pies share, and they dont 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:

• Lobbies
• Tariffs
• Government subsidies
• Grants
• 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 wealths shares. It means that the company will generate income without risking its capital and without being productive. 

Example one 

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. 

Example two 

Lets 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.

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns