Wednesday, October 17, 2012

Another Rent Seeking Analogy

If you regret having missed your chance to learn about rent seeking the costly (and therefore more memorable) way, why don't you take your chances on one of  many popular penny auction sites? As a customer, you pay a non-refundable fee to place a bid on an item. Your bid increases the bid-price of the item by one penny. When time is up, the winner pays his bid price, and the auction site collects that price in addition to $0.75 per bid. For example, if an auction for a $25 amazon gift card closes at $10.36, the site collects $756.28 (1036 bids costing $0.75 each and $10.36 for the final bid).

At least this auction model, like Professor Coppock's dollar auction, is a profitable one. Rent (or, more specifically, low-priced electronics) seeking behavior is costly to the seeker, but it isn't costly to society as a whole. The marginal cost of producing a bid is zero, and if something that is free to produce sells for almost a dollar, the purchase acts, at worst, as a transfer payment.

If, instead of paying for a bid, the rent (or, more specifically, political office) seeker had to pay to print and send me a flyer with a picture of his face on it (oh, Mitt...), that activity would have more of the detrimental effects of rent-seeking. That $0.75 would be destroyed wealth, a pure dead weight loss to the economy.

No comments: