Transcript AGRICULTURAL, FOOD AND RESOURCE POLICY (AGEC 430)

Chapter 3 :
THEORY OF RENT
SEEKING
Introduction
• Agricultural Policy
• Definite course of action
• Decision among alternative
– Large budget costs
– Surplus products
– Trade wars
• Debate: proper role of Government
– Cochrane – Yes - good society
– Tweeten – No - distortion
• Should government be involved?
– Why is government involved?
• Theory of public choice
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Premise: self-interest of government
Objective: Retain power - votes
Interventions: taxes, subsidies
Interest groups – influence – rent seeking
• Political market – supply and demand
– Choices that are economically inefficient
– Politically efficient
Why does policy exist?
1) Market failure
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externalities
benefits/costs not reflected in prices
inefficient allocation of resources
sub-optimal solution
Intervention:
• market equilibrium closer to social optimum
• Rational basis for intervention?
– Ronald Coase (1930’s)
• property rights is the problem
• Create rights & the market will work
2) Robin Boadway (1997) – 3 reasons
• Efficiency – externality argument
• Stabilization
• distribution
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Distribution and rent-seeking
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Redistributive government, prey to rent-seeking
Rent-seeking – active redistribution
Incentive to organize and lobby government
e.g. SM-5, CPR
Institutions and goods
• Institutions help define the nature of goods
and the rationale for intervention
• 3 types of goods
• private
• public
• common access
• Characteristics
– a) form, location, time
– b) excludability
• defined property rights
• enforcement
– c) rivalry
• Government intervention
– change the nature of a good
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E.g. plant genetics –
Bill C-20 Plant Breeders’ Rights Act (1990)
Bill C-91 (patent protection) (1993)
Drug Patent Act
3.3 Goods & Services in the Economy
QUESTION:
When is it more efficient for the government to provide goods and services instead
of the market ? When is it efficient to intervene?
The Alternatives:
1 The market
2 Government
3 Civil society; participatory sector
ANSWER:
It depends on the type of goods being provided, and their characteristics.
1 Rivalry - divisibility
2 Exclusivity - excludability
3 Vo ice
Types of Goods:
1 Private
2 Public
3 Common Pool Ğcommon property and open acces s goods
Picciotto's (1995) Framework
Government
PUBLIC
Exclusive
Voice
COMMON
POOL
PRIVATE
Market
Rivalry
Civil Society
Collectives
Public Choice & Rent Seeking
Policy process - 3 main groups:
– Government & bureaucracy
– Interest groups
– Tax payers
Each group has interests (increase benefits)
Economic Theory of the Consumer
Assumption: individuals max U – self-interest
Theory of Public Choice
- Seeks to explain policy choices
- about voting behaviour and politics
U(RS) = F(political outcomes)
U(RS) = F[Income(politics)]
U(G) = g(voting by RS)
Rent seeking system:
Interest groups influence government
Government tries to influence interest groups
What is rent-seeking activity?
Activity – actions
individual or group
Purpose:
obtain favourable outcomes or
avoid unfavourable outcomes
Activities that may lead to policies that facilitate the
transfer of economic rents from one group to another
in society
Positive or negative impacts
resource allocation and efficiency
Government:
Elected politicians – election-votes
Bureaucracy – jobs, salary
a)
b)
Rent-seeking bureaucrats:
New policy – new jobs, security
Coalitions with industry –
RR wheat + CFIA
Rent-seeking – Always bad?
a)
Predominant view – RS => misallocation
• No distortions – competitive markets
• Waste of resources
• Political-economic resource transfers
b)
Benefits to rent seeking
Effective intervention requires information
RS – source of information on social needs
(social welfare function)
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Potential efficiency gain
“Second Best” solution
Examples of rent-seeking
• Supply management boards
– ensured high tariffs are imposed although contrary to
GATT rules
• Canadian Pacific Railway
– lobbied for monopoly status in early years
– blocked the construction of competing rail lines
• Common Agricultural Policy (EU)
– Generous grain production subsidies
– Import tariffs
– Export subsidies
• US Sugar Lobby
– Tariffs – quotas
Categories of rent seeking (Rausser)
• Political economic-seeking transfers (PESTs)
– Purely an economic transfer rent seeking
behaviour
• Political economic-resource transaction
(PERTs)
– Attempts to correct market distortions
• Government:
– Balance PERTS/PESTS
PERTS/PESTS (OECD, 2000)
PSE
PESTs
PERTs
(% of PSE)
(% of PSE)
Wheat
33
79.2
20.8
Milk
71.2
94
6
Eggs
26.6
75.8
24.2
Beef
18
26.7
73.3
Pork
16.6
16.3
83.7
- Data from late 1980’s
Canada: Support to Agriculture ($CA Billions)
Producer Support ($B)
PSE (%)
Consumer Support ($B)
Total Support ($B)
Transfers from consumers
Transfers from taxpayers
Total Support/GDP (%)
1986-88
8.05
36
- 3.79
10.01
4.14
5.88
1.80
2004-06
7.96
22
- 3.63
10.82
3.63
7.19
0.79
2006
8.53
23
- 4.23
11.46
4.23
7.23
0.80
United States: Support to Agriculture ($US Billions)
Producer Support ($B)
PSE (%)
Consumer Support ($B)
Total Support ($B)
Transfers from consumers
Transfers from taxpayers
Total Support/GDP (%)
1986-88
36.8
22
-3.0
64.1
14.8
50.9
1.35
2004-06
38.1
14
19.6
101.5
10.2
92.8
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2006
29.3
11
25.9
96.9
5.7
92
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Other Countries PSEÕs(2002-06)
New Zealand Ğ 3%
Australia Ğ5%
EU Ğ32%
Japan Ğ55%
Iceland Ğ75%
OECD, Paris: Agricultural Policies in OECD Countries: Monit oring and Evaluation (2007)
PERTS vs PEST OUTCOMES
• PEST’s
– Commodities with inelastic demand and supply
– Supply managed commodities
• PERT’s
– Commodities traded in the world market
– Elastic demand
• US - PSE
– increased 1997-2000
- Support levels built into the 1996 Farm Bill
Rent Seeking – conflicts & coalitions
• Multiple rent-seeking groups
– Rent-seeking conflicts
– farmers vs. consumers vs processors
– Farmers vs. Environmentalists
• Input subsidies - reduced GHG emissions
• Coalitions & logrolling
– Multiple groups – common objective
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Commodity groups
Farm organizations
Input manufacturers
Grain handlers
Consumers
• Common goal: Increased farm output
Lobby Groups
• Farm organizations
– Canadian Federation of Agr. (CFA)
• umbrella group
– National farmers Union (NFU)
• Individual membership
– commodity groups
• lobby government directly
– Western Canadian Wheat Growers Assoc
– Canadian Cattlemen’s Association
– Dairy Farmers of Canada
– provincial groups
• UPA
• Dairy farmers of Ontario
• Sask. Organic Directorate
• Private companies
• Government problem
– Who speaks for Canada?
– Free trade vs protection
– Consumer protection vs freedom to farm