Answers for the end of the Book


I. What is rent seeking? Why does it lead to inefficient outcomes? Briefly explain the relevance of rent seeking to inefficiencies associated with two of the following:

Rent seeking is the bearing of costs in order to gain at someone else's expense--to transfer value from another person to the person bearing the costs. It is inefficient because individuals have an incentive to bear costs that benefit themselves even when they produce no net benefit, hence when bearing them is inefficient.

A. Burglary

The burglar spends time and money transferring goods from other people to himself; potential victims spend time and money trying to prevent such transfers. The transfer itself may be a wash (is a wash if what is stolen is money--goods are likely to be worth more to their owner than to the thief), but the expenditures on transferring and preventing the transfer are a net loss--rent seeking.

B. Monopoly

Firms bear costs competing to become the monopolist--for instance, by entering a field early inorder to preempt potential competition.

C. Speculation

Speculators spend money acquiring information in order that they, rather than other people, will own goods when their prices go up. The expenditure is designed to produce a transfer, hence is a net cost. The case is complicated by the fact that the same activity produces an indirect benefit, as people adjust their behavior to take account of the information revealed by the price changes produced by the speculator.

D. Efficient punishment

A sufficiently efficient punishment transfers from the convicted offender to someone else. That someone else then has an incentive so spend resources catching and convicting people in order to punish them--whether or not they are guilty.