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ECON305: Public Finance

Unit 4: Rent Seeking and Other Government Failures   In this unit, we will discuss the implications of several Public Choice models that relate to raising and spending of government revenue.  We will begin by “rent-seeking.”  Rent seeking refers to lobbying the government for policies that give interest groups above-market profits.  Subsidies and taxes are potential tools for rent-seeking.  If Company A can get the government to tax a competitor (Company B) more heavily or subsidize Company A directly, it can earn “rents” by being able to operate at a lower internal cost.  We will revisit the question of government failure as a result of rent-seeking behavior. 

Next, we will consider how arguments in favor of rent-seeking are framed “in the public interest.”  Bruce Yandle's theory of “Bootleggers and Baptists” tells the tale of how publicly interested persons end up supporting their opponents.  “X-inefficiencies” are those that arise from subsidized industries that need greater and greater subsidies to survive, and thus spend more money to secure those subsidies.  The term “Iron Triangles” refers to relationships of mutual interest that form between special interest groups, bureaucrats, and politicians and effectively block democratic efforts to reduce or remove special subsidies and taxes.  We will then consider several efforts that have been made to get around these problems, including The Grace Commission, the Graham-Rudman Act, and the Base Realignment and Closure Commission.

4.1 Basics of Rent Seeking and Government Failure   - Reading: MBA651’s “Public Goods & Rent Seeking: Rent Seeking” Link: MBA651’s “Public Goods & Rent Seeking: Rent Seeking” (PDF)
 
Instructions: Please read the section titled “Rent Seeking.”
 
Terms of Use: The article above is licensed under a Creative Commons Attribution Share-Alike 3.0 License.  It is attributed to contributor's to MBA651 Fall 2007’s wikispaces page, as a portion of the original post titled “Public Goods, Rent Seeking,” and the original version can be found here.

  • Lecture: Tutor2u’s “Government Failure” Link: Tutor2u’s “Government Failure” (Adobe Flash)
     
    Instructions: Please review the presentation in its entirety.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.

4.2 “Pork Barrel” versus General Welfare   4.2.1 Industry Protection: Bootleggers and Baptists   - Reading: Wikibook’s “Industry Protection” Link: Wikibook’s “Industry Protection” (PDF)
 
Instructions: Please read the section titled “Industry Protection” in its entirety.  This section begins at the bottom of page 4.
 
Terms of Use: This wikibook is licensed under the Creative Commons Attribution-ShareAlike 3.0 License.  The original version of this wikibook can be found here.

4.2.2 The Iron Triangle: Bureaucracy, Politicians, and Special Interests   - Reading: NMcBeth’s “Synopsis of Interest Group Theory” and Wikipedia’s “Iron Triangle” Link: NMcBeth’s “Synopsis of Interest Group Theory” (PDF) and Wikipedia’s “Iron Triangle” (PDF)

 Instructions:  Please read both texts in their entirety, paying
particular attention in the NMcBeth reading to how interest groups
are able to overcome the free-rider dilemma.  
    
 Terms of Use: The article by NMcBeth is licensed under a [Creative
Commons Attribution-NoDerivs 2.5 Generic
License](http://creativecommons.org/licenses/by-nd/2.5/).  The
original version of the NMcBeth article can be found
[here](http://metaphoric.squarespace.com/metaphoric/2006/10/25/synopsis-of-interest-group-thoery.html).  

 Terms of Use: The Wikipedia article above is released under a
[Creative Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/).  You can find
the original Wikipedia version of this
article [here](http://en.wikipedia.org/wiki/Iron_triangle_%28US_politics%29).

4.2.3 Examples of Rent Seeking Behavior   - Reading: Rent Seeker Watch’s “Premium Tobacco Seeking Tax to Hurt Generic Brand” and “Sleezy Realtors Stop Rent Seeking;” People's World’s “Military Bases Are No Solution for Jobs, Economy” Link: Rent Seeker Watch’s “Premium Tobacco Seeking Tax to Hurt Generic Brand” (PDF) and “Sleezy Realtors Stop Rent Seeking” (PDF); People's World’s “Military Bases Are No Solution for Jobs, Economy” (PDF)
 
Instructions:  Please read all of these articles in their entirety, identifying what the “rent” is in each case, and what strategies the “rent seekers” are taking to gain this benefit.  Do you think these represent a justified use of public resources?
 
Terms of Use: The articles from Rent Seeker Watch are licensed under a Creative Commons Attribution-NoDerivs-NonCommercial 1.0 Generic License.  The original versions are no longer available. 

 Terms of Use: The article from People's World is is licensed under
a [Creative Commons Attribution-Noncommercial-No Derivative Works
3.0 United States
License](http://creativecommons.org/licenses/by-nc-nd/3.0/us/).  The
original version of the People's World article can be found
[here](http://www.peoplesworld.org/military-bases-are-no-solution-for-jobs-economy/).

4.3 Efforts to Combat Rent Seeking and other Government Failures   4.3.1 The Grace Commission   - Reading: Wikipedia’s “The Grace Commission” Link: Wikipedia’s “The Grace Commission” (PDF)
 
Instructions: Please open the link above and complete the reading about The Grace Commission in its entirety.

 Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/).  You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/The_Grace_Commission).

4.3.2 Gramm-Rudman Act   - Reading: Wikipedia’s “Gramm Rudman Hollings Balanced Budget Act” Link: Wikipedia’s “Gramm Rudman Hollings Balanced Budget Act” (PDF)
 
Instructions: Please complete this reading in its entirety.

 Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/).  You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Hollings_Balanced_Budget_Act).

4.3.3 Base Realignment and Closure Commission   - Reading: Wikipedia’s “Base Realignment and Closure Commission” Link: Wikipedia’s “Base Realignment and Closure Commission” (PDF)
 
Instructions: Please complete this reading in its entirety.

 Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/).  You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/Base_Realignment_and_Closure).

4.3.4 Decentralization   - Reading: IMF.org: Daniel Treisman’s “Decentralization and the Quality of Government” Link: IMF.org: Daniel Treisman’s “Decentralization and the Quality of Government” (PDF)
 
Instructions: Please read the text in its entirety.  To access the reading, follow the above link and click on the link to “Decentralization and Quality of Government:” 
 
Note on the Text: This reading was presented at Conference on Fiscal Decentralization sponsored by the IMF in November 2000.  If you have further interest in the topic, feel free to read some of the other readings contained in the site.
 
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4.3.5 Privatization   - Reading: Dimitar Dimitrov’s “The Potential Benefits of Privatization and the Political Issues” Link: Dimitar Dimitrov’s “The Potential Benefits of Privatization and the Political Issues” (PDF)
 
Instructions: Please read this text in its entirety, paying particular attention to the potential benefits of privatization.
 
Terms of Use: Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-NoDerivsatives License 3.0.  It is attributed to (Dimitar Dimitrov) and the original version is no longer available.

4.3.6 Public-Private Partnership   - Reading: Wikipedia’s “Public-Private Partnership” Link: Wikipedia’s “Public-Private Partnership” (PDF)
 
IInstructions: Please click on the link above to access the document.  Complete this reading in its entirety (7 pages).

 Terms of Use: The article above is released under a [Creative
Commons Attribution-Share-Alike License
3.0](http://creativecommons.org/licenses/by-sa/3.0/).  You can find
the original Wikipedia version of this article
[here](http://en.wikipedia.org/wiki/Public%E2%80%93private_partnership).