What Is Rent-Seeking?
Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The most common occurrence is when a company or industry lobbies the government to receive special subsidies, grants, and tariff protection. The term "rent" in economics means receiving a payment that is over the costs involved in the production of the item or keeping the item in service. These actions do not produce any benefit for the community-at-large but only redistribute taxpayer's resources.
According to 18th-century philosopher and the father of economics, Adam Smith, entities earn income from wages, profit, and rent. To create profit usually requires the risk of capital with the goal of gaining a return. Earning wages comes from employment. However, of the three income sources, rent is the easiest to obtain and subjects the individual or business to the least amount of risk. It requires only resource ownership and the ability to use those resources to generate income. One way to do this is by lending capital or other resources to others.
Because rent income implies less risk or work than other types of income, individuals and companies seek to earn this income whenever possible. Rent-seeking becomes a problem when entities engage in the practice to increase their share of the economic pie without increasing the size of the pie.
- Rent-seeking is an individual's or company's use of resources to get economic gain without giving back a benefit to society.
- Rent is an economic term for payment above the cost involved.
- An example of rent-seeking is when a company lobbies the government for grants, loan subsidies, or tariff protection.
How Rent-Seeking Works
Politicians decide the laws and regulations that govern the industry and how government subsidies are distributed. If a firm succeeds in getting laws passed to limit their competition or create barriers to entry to others, the firm will increase its share of available wealth. Moreover, it has earned income without being productive or putting its capital at risk.
Real World Example of Rent-Seeking
Lobbying for the lessening of occupational licensing requirements is an example of rent-seeking. Doctors, dentist, airline pilots, and many other fields require licensing to practice. However, in many U.S. states, this licensing process is expensive and time-consuming. Often, regulations exist due to past lobbying efforts from existing industry members. If certification and license obligations prevent newcomers from competing, fewer professionals may share the revenue.
Thus, a more significant portion of money accrues to each existing member without additional economic benefit. Also, since competition drives down prices, consumers pay more than they would in an efficient market without rent-seeking.
According to Al Jazeera News, Iranians have been cutting costs due to an uncertain future under U.S. sanctions. The Central Bank Governor, Abdolnasser Hemmati also admitted in an Instagram post that the subsidized "currency allocation policy has mostly benefitted middlemen, contributing to corruption and rent-seeking activities." These issues allowed intermediaries to grab "cheap currency to import essential goods, but instead hoarded goods or sold them at the open market rate."