The Theory of Rent

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The theory of rent-seeking is a hot topic in the Economic society. It is also one of the
most challenging subjects in research. The behavior of rent-seeking is a common phenomenon
in the market economy. Rent-seeking is a non-productive form economic gambling, leading to
the waste of Social resources, repression of fair competitions, refusal of system creation, and
resistance of social civilization. Therefore, it is of both theoretical and practical significance to
analyze the problem of rent-seeking in the government to probe into the methodology of
supervising and controlling the behavior of rent-seeking. This paper starts with a review on the
theory of rent-seeking, and proceeds with an analysis on the government behavior. Finally,
suggestions are reached to renovate the problems in the current government. There are three
parts in the paper. First, is a general discussion of the definition and classification of rentseeking, the review of major theoretical schools of rent-seeking, and the system environment,
cost and aftereffect of rent-seeking. Second, focuses on the basic theory of the government’s
behavior of rent-seeking, including the causation, evolution and the effect on the development
of economics in our society. Last, I will discuss the types and reasons for political and social
inequalities created by rent-seeking.
Rent-seeking in a modern economy is spending money on political lobbying for
government benefits or subsidies in order to be given a share of wealth that has already been
created, or to impose regulations on competitors, in order to increase market share.The
concept of rent-seeking would apply to corruption of bureaucrats who solicit and extract bribe
or rent for applying their legal but discretionary authority for awarding legitimate or illegitimate
benefits to clients.
Regulatory capture is a related concept which refers to collusion between firms and the
government agencies assigned to regulate them, which is seen as enabling extensive rentseeking behavior, especially when the government agency must rely on the firms for knowledge
about the market. Studies of rent-seeking focus on efforts to capture special monopoly
privileges such as manipulating government regulation of free enterprise competition. The term
monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking.
Often-cited examples include a lobby that seeks economic regulations such as tariff protection,
quotas, subsidies, or extension of copyright law.
Inequality means there is a gap between the highest income earners and the lowest
income earners. On the one hand, you can argue inequality is necessary for providing incentives
in a free market economy; without a degree of inequality there would be economic stagnation
and lack of enterprise. On the other hand, you could argue that inequality has many
disadvantages and is evidence of fundamental problems in society.
Arguably, inequality is a type of market failure. Market failure occurs when there is an
inefficient allocation of resources in a free market. If firms have monopoly power, they are in a
position to set higher prices to consumers. This leads to a redistribution of income from

consumers to the shareholders of monopolies. Here, the inequality is based on an unfair
distribution of power in society. Monopoly occurs when a firm has market power in employing
workers at a wage below the competitive equilibrium. It means the wage workers are paid will
be lower than the marginal revenue product of labor. This leads to an unfair distribution of
income away from workers. Again the inequality arises from some firms having the power to
set wage rates.
Inequality is the main reason behind social friction. It can be a factor in precipitating
riots or higher crime levels. In this case all members of society lose out. This is more pressing if
the inequality is perceived to arise out of unfair allocation of opportunities. The biggest cause
of relative poverty is unemployment. Unemployment is considered a type of market failure
because it represents an inefficient allocation of resources in a free market. Inherited wealth
gives people an ‘unfair’ advantage in life. It may also make them lazy as they can live off rent,
profit and dividends.
If someone works harder and as a consequence receives a higher wage then this is not
market failure. The promise of a higher wage is essential to encourage extra effort. By
rewarding hard work, there will be a boost to productivity leading to a higher national output –
so everyone can benefit. Also, inequality is necessary to encourage entrepreneurs to take risks
and set up new business. Without the prospect of substantial rewards, there would be little
incentive to take risks and invest in new business opportunities. If some people gain extra
income, then this can trickle down to other people. For example, an entrepreneur who sets up
a business may become a millionaire, but also will create jobs and provide incomes for other
workers. There may be a gap between highest and lowest earners. But, the lowest earners are
still better off than without the entrepreneur.

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