Rent Seeking in a Minarchist State

Intuitively, one may assume rent seeking would be eliminated once government is deprived of the power to regulate. However, one may wonder if government could ever be completely stripped of such a power. Even in a minarchist state, one based on libertarian principles, there would still be opportunities for firms to seek certain beneficial government action. One case I have thought of was in cases of defense; as long as governments exist, their duty will be to defend their subjects. Such a duty involves paying for defense materials: arms, etc.. Hence, defense contractors will seek to have the government buy their weapons, the government only needing a certain amount of a certain type of weapon. There is also another case mentioned in this article. If a libertarian government is constantly engaged in nudging its subjects into certain behaviors (the extent of which is ultimately unclear), there would certainly be cases where a firm could seek for that nudge to be in its favor. The implication of such a realization? A government will almost always lead to rent seeking, which will always lead to the misallocation of resources. One could only hope to limit the amount of resources that are put into rent seeking by limiting what a government could actually do.

Airline Regulations eased or new ones added?

          This CNN article describes major airline reactions to the latest change to Airline regulations  electronic devices are now allowed during all parts of a flight.  The only hitch is that you have to get each aircraft approved by the FAA to be able to do this.  US Air and Southwest will be among the first to  receive approval (They are also among the largest airlines in the US).  Spirit Airlines (a smaller airline) on the other hand did not give a time table of when their aircraft will be approved.
          While this may seem like deregulation, this could be another example of rent seeking by the large players in the airline industry.  The cost of filing the additional paperwork to get the luxury of allowing electronics at all times on aircraft is more easily covered by the incumbents in the industry with larger market shares and deeper pockets.  At first glance, this appears to benefit passengers, but the new regulations could concentrate the market even further raising both profits for larger airlines and prices for their passengers.

Uber Unfair Regulation

I'm glad that this course has given me a much better understanding of government regulation, but real-world examples still make me sad sometimes.

Uber is an awesome startup from San Francisco whose premise is immediately attractive. They designed a great iPhone app that you download. You open the app, hit a button, and within minutes a car comes to pick you up. It takes you to your destination, and you just get out -- the app already has your payment info, so they can charge you automatically. They have also created an awesome backend and give iPhones to black car drivers who can pick you up. Their algorithms for sending people to the right places are remarkably better than what most Limo companies currently use, and so through their use of technology they make people much better off.

But, as this NYT article discusses, regulators have been fighting back against Uber. They've been forced to shut down certain operations in some cities, and may soon be made to close entirely. Of course, excuses are always made:

Services like Uber, Airbnb andCraigslist can cut out the middleman and lead to more efficient markets. But regulators say they could also put consumers at risk.

One example they cite of "harming consumers" is particularly interesting to an economist. Regulators cite how for busy nights like New Years Eve or in the aftermath of Hurricane Sandy, Uber was "price-gouging" by raising their prices quite a bit. It's obvious from a moment of thinking about it that this is an efficient and good thing: by raising their prices, they prevent themselves from facing a shortage and inability to provide cars to those that ask, and instead allocate them to those who value them the most and are willing to pay, rather than just a random selection of first-come, first-served. Regulators though prey on the general public's misunderstanding of such phenomenon cast Uber as an evil, greedy organization that threatens to upset the important infrastructure of ride-for-hire transportation.

I'm hoping Uber comes out on top, but with Taxi services so entrenched and regulators so thoroughly captured by monopolistic companies, I'm not necessarily hopeful.

Update: Today, however, a major victory for Uber in Washington DC. So it's not always bad! Sometimes the good guys lobby well enough to win!

Acquiring Liquor Regulation

Last semester, in Professor Larson's Auction Theory class, we studied Washington State's auction of their liquor stores as part of our final exam, and the story had lots of public choice implications.

Washington used to have a state monopoly for liquor sales (why this would have been the case in the first place is an interesting topic for public choice study, but I won't get into that here). As has been the case in many states, there was a movement to upend the public monopoly and allow for private sales. What many people don't realize, however, is that these efforts have been largely spearheaded by big-box retailers, namely Costco and Target. Their lobbying efforts meant that when the voter referendum to disband the state monopoly was finally on the ballot, it created a new regulation: the state would no longer be involved in liquor sales, but from that point forward only stores greater than 10,000 square feet in size would be allowed to sell liquor.

When I learned about it, this blew my mind: this regulation seems so obviously detrimental to public welfare and so clearly designed only to serve the interests of the lobbyists that it was honestly surprising to me. It hides behind the veil of

public concerns that gas stations and mini-marts would be allowed to sell liquor, 

but more realistically seems directed at preventing competition from smaller entrants. Perhaps I shouldn't have been surprising - Stigler's analysis of how firms acquire regulation to keep out new competition and support themselves appears to fit this situation perfectly.



(Note: Also of interest, though not necessarily as closely related to public choice, is the auction process that went on in this case. The existing state stores were auctioned off to public buyers, and they were granted special exemptions to the 10,000 square foot rule and allowed to continue operation.)

Research supports Stigler

None of us likes that our parties' tab at Trinity can go well into the three figures. It's annoying that you can't purchase alcohol after midnight or on Sundays. Stigler writes that "every industry or occupation that has enough political power to utilize the state will seek to control entry" and that regulation is intended to protect at least a large portion of the population. While the liquor industry stays thriving when a single shot costs $10, we, whether we like it or not, benefit from this regulation.

My stomach fell when my brother (who is at Clemson) told me that someone brought moonshine to his frat's party; I thought of all the awful side effects of this unregulated product. This article that I read on a pro-alcohol policy site, lists the reduction in negative consumption externalities if alcohol costs 10% more. You can read the full list on the website but the negative externalities reduced by raising alcohol prices range from a 3.6% drop in sexual assaults/rapes to an increase in the ease of creation of new businesses. In my research at UVA hospital, I see the damage alcohol has done every time I collect data. As much as I think that the government shouldn't make every moral decision, I also kinda wish that these participants and other alcoholics had been "priced out" of the alcohol market.

The only problem that I have with Stigler's work is that he doesn't address the fact that higher prices can lead to secondary markets. When Stigler goes down to South Carolina and regulates the moonshine market at Clemson, I'll be happy.

A Painfully Funny Look at Representation in the US

A satirical article in the Onion [the site is slightly NSFW] mocks the representative democracy that has come to define the US. Here, the American people apparently have hired a high-powered lobbyist to "help advance their agenda in Congress." Tired of being a "low-priority fringe group," all 310 million Americans have decided to take the big business route to make themselves heard. The article is saturated with irony, making the reader take a good look at how the average citizen's interests have been pushed aside for private ones. Irony aside, some quotes hit too close to home like,

"The goal is to make it seem political advantageous for legislators to keep the American people in mind when making laws," Weldon said. "Lawmakers are going to ask me, 'Why should I care about the American people? What's in it for me?'"

Therein lies the value of satire: constructive social criticism. What is in it for lawmakers to help the average citizen, who does not have the influence or resources of a large corporation? Re-election? Not necessarily. Virtue? Maybe, but Stigler points out, "Unfortunately virtue does not always command so high a price." In a government where we find that money often equals votes, hiring a lobbyist for special interest group "American citizenry" is not as far-fetched as it sounds; looking at how much clout industrial giants and special interest groups hold, it might even be the rational choice. In the article, they're paying the lobbyist $795 an hour; if that were the only cost of organizing, then the latent group could awaken as well. If elected representatives are placing their constituents' concerns last anyway, what's the point of voting?

I think that, given the article's suggested direction that America is heading toward, there are also a lot of implications that need examining. It's no secret that special interest groups are influential, but do they have the potential to uproot our democracy? Does everyone need to be in a special interest group to be counted? How is this new representative system changing the US?

Stigler and Proposition 19

California’s Proposition 19, if passed in the November election, will ‘legalize, tax, and regulate’ the production, sale, and use of recreational marijuana in the state. Regulation will vary between municipalities, but, in general, growers will be able to set up legal businesses, and restrictions on growing for personal recreational use will be lessened. Opponents of the bill can be divided into several groups with different motivations. The law enforcement and prison industry favor the status quo where they receive large amounts of federal funding for the ‘War on Drugs.’ Non-profit ‘public interest’ groups argue that legalization will have negative effects on society. Marijuana’s competitors, the wine, beer, and liquor industries have opposed the proposition and contributed significantly to the campaign against it, because, if passed, it will increase competition for their products.

Two additional groups that oppose Proposition 19 are already in the marijuana business. These are the large (illegal) commercial producers and the legal medical marijuana dispensaries. While this may seem counterintuitive to many people that marijuana producers support prohibition, this is in line with Stigler’s theory that, if possible, industries will seek government regulation that limits entry into their industry, decreasing competition and allowing them to keep prices high. It is difficult for criminal marijuana producers to make a public interest argument, or lobby the government or the public successfully. However the medical marijuana producers have publicly come out in opposition of the bill with the ‘public interest’ argument that the way the bill is currently written will decrease access to medical marijuana for patients who really need it. This article from The Huffington Post argues that the bill will have no affect on the availability of medical marijuana to the sick and elderly, and shows that the language of the bill contains special provisions to prevent it. Some of the more prominent figures opposing Proposition 19, such as Mary Rathburn and Dennis Peron, are same people who wrote and supported Proposition 215 that legalized medical marijuana. They are also the owners of some of the largest medical marijuana dispensaries in the state.

Rent-Seeking and Economic Regulation Hurts Those in Mourning in Maryland

This 2006 article from the Baltimore Sun discusses how expensive funeral services are in Maryland (not to mention everywhere else in America) due to an early 20^th century state law that was passed in order to protect consumers from unreliable morticians; the article goes on to reveal that this law is actually popular amongst funeral business owners today in Maryland because they can use it to prevent legitimate funeral service businesses from opening up around them. The author of this article states that “funeral directors couldn't engineer this protection by themselves; they've had help from state lawmakers who have prevented attempts to reform the funeral laws. Few Marylanders are aware that one of Annapolis's more generous political benefactors is the Maryland State Funeral Directors Association.”

With this quote, the problem of rent-seeking within the funeral service business in Annapolis, Maryland becomes obvious. In terms we have discussed in class via Tullock’s chapter on the topic, because of the monetary gains that can be obtained from keeping regulatory state laws in place, there is an incentive for funeral business owners today to give money to the Maryland state government (aka spend resources on rent-seeking expenditures), and thus money is spent away from the natural direction of the market. Funeral home owners have fought innovations in the funeral service business that would lower funeral costs by “working with their politician friends…they have defended and strengthened anti-competitive funeral regulations aimed at stemming the tide of Internet casket sales, the expansion of funeral home chains and the popularity of cremations.”

In this rent-seeking case in Maryland, resources were wasted trying to obtain the “rent” of regulation to entry in the funeral service business. Therefore, I also felt as though this article was interesting because it provided a real life example that tied Tullock’s article on rent-seeking to Stigler’s article on economic regulation. The author of this article states that “people usually think that businesses dislike regulation. But businesses often find it profitable to have regulations crafted to impede would-be competitors. This allows politically well-connected businesses to charge higher prices and manipulate consumers' choices.” With this quote, Stigler’s argument of how businesses like government regulation because it gives them market power and control is proven. The funeral business owners give money to the government (rent-seeking) in order to make sure that it is hard for new funeral service businesses to open up and therefore their prices can stay high (theory of economic regulation).

My question after reading this article is, how will this cycle of rent-seeking and unnecessary regulation over entry into a market be fixed? Or will people in Maryland just always have to pay more for their funeral services?