Question

Traditional economic thinking suggests that government exists to fix problems with the market, e.g. limit pollution, inspect meat, regulate airline safety,provide aid for the indigent. They are supposed to act in the public interest.

But so-called public choice economists argue that government agencies act in their own self interest, expanding their regulatory scope or the size of their budget. According to public choice economists, their monopoly power to dictate such edicts, such as the paperwork required to get a housing permit, allows these agencies to grow inefficiently large.

Private firms and interest groups can also use their influence to gain favors from the government, another tenet of public choice economists. This is called “rent seeking”.

Questions:

1. Can anyone think of an example of rent seeking by private firms or interest groups?

2. Can anyone cite an example of the government acting in their self interest, rather than in the public interest?

Answer 1

In Oligopolistic market structure, equal market share firms compete with each other and lobby with government to propose changes in rules and regulations that favor one player which is an example of rent seeking. This creates misallocation of resources and market inefficiency and affects consumers.

Government acts in their self interest for example levying higher taxes on private firms for dividend distribution which helps government seek additional source of revenues which can be spent for meeting fiscal deficit.