Licenses for Medicine in Ecuador

In 2009 Ecuador’s government overrode hundreds of patents from foreign pharmaceuticals in order to produce medicine domestically, with the justification that the national medicine (generic medicine) would be sold at a lower price. However, in order to produce the medicines, medical laboratories required a license from the government. Obtaining these permits have multiple limitations, and there are currently very few companies that have acquired it. 

The license implementation has induced a social cost in different ways. First, given that the market opportunity is so big, there are high rent seeking intentions. The returns from producing medicine are far greater than the opportunity cost of using the inputs elsewhere. The rent seeking expenditures are not only a transfer of wealth from the potential producers of medicine to the government to obtain the license; but also includes the cost of the inefficient use of resources, the goods will be better produced in terms of cost and quality by foreign companies. Although the generic medicine is sold at a lower price than import goods, this price is probably a lot higher than what it would be under a competitive market. Therefore, there is a dead weight loss in addition to the previously mentioned cost. Both of these social costs are what Tullock refers to as the social cost of monopolistic behavior. Even though this is not a monopoly because there is more than one firm, the industry has the same characteristics because of high barriers to entry. 

Moreover, these licenses have also created costs of unemployment from people who used to work in foreign pharmaceuticals, as most have reduced their size or shut down in the last five years. Finally, something that is not always seen through a political perspective involves the quality and availability of the medicine. There are many medications that can no longer be found in Ecuador, and there are big concerns from doctors in regards to the quality that these medicines have. This is the result of a lack of technological resources and expertise from the Ecuadorian producing laboratories, which in turn increases the effects of the misuse of resources that these licenses have formed.

The ones who have been affected from these decisions, and are paying for the costs are society, not only their money is being wasted but their health is also affected. 

Rent-Seeking in the Lodging Industry

New York passed a law last month that prohibits New Yorkers' advertisement of short term home rentals, directed at the growth in the Airbnb business that has been taking over the lodging industry across the country, including New York. The new law signed by the NY governor Andrew Cuomo, which will impose up to $7,500 fines on rental listings that are for shorter than one month, was presented from one angle as "necessary to protect affordable housing" in New York.

However, after reading George Stigler, we can look further and see that this law is an effort by the American Hotel and Lodging Association (AHLA) to control entry by substitutes. Here, the hotel industry is looking to maintain the rents that they earn from providing essentially the only option for short-term renters taking a brief vacation to New York, particularly during the holiday season. By encouraging regulation over options that would take away customers from New York hotels through lobbying efforts, the AHLA is reducing competition for hotels and therefore using regulation to keep earning rents in the lodging industry. With fewer options, consumers are far more likely to purchase a hotel room for their vacation and because there are very limited alternatives, they'll be willing to pay a higher price.

Alcohol Control in Colorado: The Slow Creak of an Opening Market

Alcohol is one of those classic products where policy is often deeply influenced by morals and potential safety risks over pure economic reasoning. The map depicted below shows the states as of 2015 that had state monopoly control over wholesaling or retailing of at least some kinds of alcoholic beverages. The obvious argument for this is something along the lines of responsible distribution to restrict use that would have deleterious effects for the individual or negative externalities for society as a whole. The estimated $230 million Virginia made from ABC stores in 2010 is also a nice consolation. However, my home state of Colorado isn't state controlled, so the free market should be fully functioning right?



Unsurprisingly, this is not the case (yet!). As of now, grocery and drugstore chains can only sell liquor, wine, and beer at one location in the state. At every location they do have the luxury of selling "near-beer," which contains 3.2% alcohol, but this is little consolation in a state known for its craft brews (that are almost always above this alcohol content level). This setup necessitates the creation of a multitude of privately owned liquor stores, which can't be chains either.

So when I went to the Trader Joe's last summer to purchase some 2016 vintage three buck chuck, I was sadly told that only one store in Denver was able to sell it. That perplexed me, until I read Stigler. The Colorado Licensed Beverage Administration (CLBA), established in 1954 and representing 1600 stores/owners, is a lobbying organization that estimated that it saved members $10 million in 2016 through "proactive legislation." Because the stores represent owners dispersed around the state, it would be hard for them to effectively lobby on their own, but with this organization, the liquor stores have been able to maintain a high degree of market control. However, in June, Governor Hickenlooper signed "the biggest rewrite of liquor code since Prohibition" in Colorado. Still, even in this decision to allow grocery and drugstore chains to sell liquor, wine, and "full strength" beer, the evidence of liquor store lobbying is obvious as it will take 20(!!!) years to be fully implemented. Overall, Colorado is tending towards a more open market approach to the alcohol sales industry, likely in part due to those who would benefit from it most such as large grocery chains, but the power of the well-organized and focused CLBA, similar to what Stigler would expect, has delayed this substantially.

Rent Seeking in East Texas

In 2013, there were "just over 6000 patent suits filed in federal courts across the country. One in four of those cases were filed in the Eastern District of Texas." How does a "largely rural district court" attract "a huge volume of high-tech patent ligitation"? The answer, in short, is rent seeking.  For the past decade, this federal court has consistently imposed policies that heavily favored the prosecution.  The result is the attraction of "patent trolls" or "kangaroo courts" designed to benefit the prosecutors in patent infringement cases at the expense of the defendant.  For example, the court system will expedite case protocol in order to litigate the "over 190 lawsuits filed in a single day." Rent seeking is evident as this rural district court has implemented laws that heavily favor the prosecuting attorneys in an attempt to make the defendant settle or risk paying heavier fees.

That being said, according to one of the previously mentioned reports, the district court and the attorneys that profit are doubling down on their rent seeking tactics by "retaining the services of Levick Strategic Communications" who have successfully lobbied the federal government in the interest of multiple groups over the past years.  If the attorneys and patent trolls interests are protected, the federal government will overlook much needed patent reform and continue to allow this system to flourish.  Naturally, the next logical step of this post is to put ourselves into the mind of George Stigler.  Using his cynical theory of economic regulation, it could be argued that the East Texas Bar Association and district court implemented these prosecution-favoring efforts originally in order to protect the small inventor from larger firms who could dwarf them with more resources and man-power. This could appropriately cover up the interests of prosecuting lawyers and patent trolls who would want the system shifted in their favor. Now that these groups are lobbying in order to slow down patent reform, it appears that their interests are solely "operating primarily for [their] benefit" (Stigler, 1) with no regard for the welfare of the public in accordance with Stigler's assertions.

Protective tariffs in the shoe industry

As discussed in class and in the Stigler reading, The Theory of Economic Regulation, industries seek to manipulate the powers of the state to obtain favorable regulation. Through monetary subsidies, control over entry, and price-fixing, various regulations serve to benefit domestic industries. Protective tariffs serve as an example of entry controls (or barriers to entry). In researching different protective tariffs, both pertinent and outdated, I came across the protective shoe tariff, which is definitely on the archaic side of the spectrum.

Implemented via the Smoot-Hawley Tariff Act of 1930, the regulation protected domestic footwear producers. Yet even throughout the 20th century, as domestic production declined and footwear production moved to foreign sites, the tariff remained. In 2011, The Tax Foundation estimated that "only 1% of US-consumed footwear is produced domestically." Up to 40% of the price of a pair of shoes can be attributed to the tariff. As AEI described cohesively, the "US has imposed protective shoe tariffs on Americans for decades, even with no domestic shoe industry to protect."

A few years ago, senators introduced legislation in an attempt to decrease the tax burden that consumers pay for shoes. Termed the Affordable Footwear Act, the legislation would eliminate "$800 million in duties on children's and low cost shoes out of the 2 billion in total duties collected on imported shoes in 2010".  The Act never made it to vote. Stigler would be especially unhappy with this tariff - not only was the tariff designed to benefit the domestic shoe industry, but it persists today with barely any domestic shoe industry left to benefit.

Is Hoo Crew Rent-Seeking?

UVA students are awarded tickets to UVA Basketball games through a lottery system, and the likelihood that a given student is selected in the lottery is directly proportional to the number of Sabre Points (accumulated by attending designated UVA sports events) the student has earned. 

I have heard from several sources that members of UVA's Hoo Crew have the ability to increase the number of Sabre Points attributed to their accounts. If true, this would mean that members of the Hoo Crew can heighten their chances of being selected in the lottery, giving them an advantage over other students who have to expend time and energy attending various games and matches to accrue enough points to give them a decent chance of winning the student lottery. 

A note at the bottom of the About section of Hoo Crew's website says that, although the organization is made up of UVA students, "it is not a part of or an agency of the University. Rather, "it is a separate and independent organization which is responsible for and manages its own activities and affairs." This is significant because the Sabre Point lottery is under the jurisdiction of UVA's Athletic Department. It would seem, therefore that members of Hoo Crew have connections in the Athletic Department that give them the opportunity to artificially increase their Sabre Point count. 

This means that members of Hoo Crew may be engaging in rent-seeking by lobbying the Athletic Department to gain an advantage over other UVA students and other members of Hoo Crew. While this lobbying may encompass the resources expended to work political connections in the Athletic Department, it also includes the time and energy spent by Hoo Crew members attending meetings and sports events to give them membership status in the organization. Each individual member of Hoo Crew is expending time to maintain their membership in Hoo Crew and to gain a standing within the organization that allows them the connections to manipulate their Sabre point totals. Hoo Crew members do not guarantee tickets by adding points to their accounts but do significantly increase their odds. Therefore, members of Hoo Crew invest resources (namely time) into their club involvement, not knowing whether they will win one of the limited number of student tickets. As more students join Hoo Crew, competition for tickets increases, and members engage in rent-seeking to give themselves a significant chance of winning a ticket. The rent therefore increases as more members invest time in the organization, and a welfare loss develops as many members waste time trying to increase their odds, only to lose in the lottery. 

The FDA According to Stigler

The U.S. Food and Drug Administration (FDA) has a wide scope of regulatory authority via the federal government. In addition to food and drugs, the FDA regulates biologics, medical devices, cosmetics, veterinary products, tobacco products, alcohol, and more. This amount of regulation is normally thought of being in place for the benefit of the public interest. Such regulations protect the public from consuming unsafe food materials. In countries without such regulatory boards, disease is spread more easily and there are higher death rates. This is justification for arguing in favor of FDA regulations on the basis of protecting the public's interest. When Americans think of the FDA, they generally think of the administration's importance on these lines of thinking.

However, Stigler would provide another explanation for the high amount of FDA regulation: the capture theory. This theory, coined because the industry "captures" the government, is that regulations benefit industry and are therefore rational to desire on the industry's side. In this case, Stigler would argue the FDA's regulations benefit the industries in which they are found. For example, companies could potentially benefit from FDA regulations if they restrict entry and thus lower the supply of the good. This would create true economic profit in the form of rent for the companies.

A counterargument to this is some biopharmaceutical industry members arguing that the FDA regulatory process diminishes their businesses' value by increasing the time it takes for new drugs to get approved. In this case, Stigler would argue regulations are not rational under this theory as they do not benefit the industry.

If Coase and Chevron were BFFs

Research done by Chevron, an American energy corporation has shown that when there is an increase in Pollution there is also an increase in the economy.  Why? Because the country is using more oil, gas, and fuel to power homes and factories to create products. But recently in the less than 50 years, Chevron shows that we’ve been able to use less energy in relation to our growing economy. For example, An increase in natural gas use opposed to polluting substances is correlated to an increase in GDP per capita. In addition, more natural gases and energy efficiency has done the following:

• Increased efficiency gains per vehicle miles traveled 
• Used less harmful gas emission per capita 
• Made electric energy more efficient 
• Declined CO2 emissions 
• Decreased pollution by a whopping 70% over the past 40 years

This example relates to our discussion of the Coase Theorem of local expenditures to an extent. Before there was a recorded decrease in pollution, there was an increase in pollution correlated with an increase in the economy. The amount of pollution, which is an external cost, plus the private cost to an individual sums up their social marginal cost. But regardless of who was liable for the pollution, whether it be the individuals driving their cars or firms’ factories giving off CO2 emissions, each party continued to produce the pollution because their marginal benefits were greater than the social marginal cost. But within the past 40 years or so, the external cost of pollution had grown to a point where it could not be offset by the marginal benefit, so to resolve the issue companies like Chevron have innovated energy efficient ways to bring the economy closer to an equilibrium point but keeping our social marginal costs lower than our marginal benefit, which is the increase in $1 of GDP per capita. Because MB > SMC, we still continue to produce pollution, but at a lower and more efficient rate.

Rent-Seeking and Cable Boxes

The Federal Communication Commission (FCC) voted in February for a tentative proposal that would essentially allow third party programmers to provide cable services that currently only companies like Comcast and Time Warner can. The FCC ruled that cable companies must build apps that can be used in other devices, like an AppleTV or Tivo, allowing a choice for customers instead of having to rent a set-top box to access cable. Proponents of this plan argue that allowing more producers would promote competition in the cable TV industry.

According to the rent-seeking model that we have discussed in class, the current cable companies like Comcast and Time Warner will be willing to spend almost all of the rent that they earn from having control over the cable industry lobbying the government, or in this case, the FCC, to maintain the current standards that allow them to be the only suppliers of cable TV. In relation to Stigler, the current cable companies are lobbying to maintain their ability to control the entry of new rivals in the industry. It is not the rent that these companies earn that is the issue, but instead it is the rent-seeking efforts where resources, like labor, are inefficiently used: the resources are being taken away from production and are instead used to lobby the government to allow them to keep earning these rents.