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Tuesday, December 15, 2015

How To Keep Telecoms From Engaging Into Destructive Rent Seeking Behaviour

I had been suggested this topic by economist Joe Dunlavy after I posted the Economics project  I made for school this year which was on 'Economic Growth Versus HDI' and I have been looking for the right enthusiasm to write on this topic ever since I had been suggested the same!
I like topics that let you do the necessary research,make them interact with other branches of Social Sciences and is substantial enough and not conventional.This particular topic has all of these necessary components.
So,let me get straight into the article.I have divided it into six separate sections to make it more comprehensible.

  • What is Rent-seeking behaviour?

In public-choice theory,ehich is a branch of Economics dealing with all the traditional problems of political science,rent-seeking behaviour refers to seeking for ways to increase one's existent wealth without creating wealth.
Attempts at capture of regulatory agencies to gain a coercive monopoly can result in advantages for the rent seeker in the market while imposing disadvantages on (incorrupt) competitors and obviously on the public.

  • How did this term come into effect (historical evolution and diagnosis) ?

The idea of rent-seeking was developed by Gordon Tullock in 1967.The expression rent-seeking was coined in 1974 by Anne Krueger.The word "rent" does not refer here to payment on a lease but stems instead from Adam Smith's division of incomes into profit, wage, and rent. The origin of the term refers to gaining control of land or other natural resources.

Georgist economic theory,which is an economic philosophy holding that the economic value derived from land, including natural resources and natural opportunities, should belong equally to all residents of a community, but that people own the value that they create themselves.The Georgist paradigm offers solutions to social and ecological problems, relying on principles of land rights and public finance which attempt to integrate economic efficiency with social justice. describes rent-seeking in terms of land rent, where the value of land largely comes from government infrastructure and services (e.g. roads, public schools, maintenance of peace and order, etc.) and the community in general, rather than from the actions of any given landowner, in their role as mere titleholder. This role must be separated from the role of a property developer, which need not be the same person, and often is not.

Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity. The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself. All he is doing is finding a way to make money from something that used to be free.

In many market-driven economies, much of the competition for rents is legal, regardless of harm it may do to an economy. However, some rent-seeking competition is illegal – such as bribery or corruption.

  • What is rent-seeking in the modern world?
This is the question of the hour.
 From a theoretical standpoint, the moral hazard of rent-seeking can be considerable. If "buying" a favorable regulatory environment seems cheaper than building more efficient production, a firm may choose the former option, reaping incomes entirely unrelated to any contribution to total wealth or well-being. This results in a sub-optimal allocation of resources – money spent on lobbyists and counter-lobbyists rather than on research and development, on improved business practices, on employee training, or on additional capital goods – which retards economic growth. Claims that a firm is rent-seeking therefore often accompany allegations of government corruption, or the undue influence of special interests.

An example of rent-seeking in a modern economy is spending money on lobbying for government subsidies in order to be given wealth that has already been created, or to impose regulations on competitors, in order to increase market share.

A famous example of rent-seeking is the limiting of access to lucrative occupations, as by medieval guilds or modern state certifications and licensures.Taxi licensing is a commonly-referenced example of rent-seeking.To the extent that the issuing of licenses constrains overall supply of taxi services (rather than ensuring competence or quality), forbidding competition by livery vehicles, unregulated taxis and/or illegal taxis renders the (otherwise consensual) transaction of taxi service a forced transfer of part of the fee, from customers to taxi business proprietors.

Rent Seeking Behaviour And Telecoms

Extraction From 'Rent Seeking Never Stops
An Essay on
Telecommunications Policy'

Rent-seeking incentives give rise to regulatory policies that appear (at
least from a distance) to be arbitrary and incoherent. A decision-making
majority can, in theory, adopt virtually any conceivable policy, given plausible
assumptions and circumstances (Mueller 1989). This understanding
has led political scientists, economists, and an increasing number of judges
to dismiss the importance of “intent” when interpreting statutes and regulatory
rules, not only because the rules are likely to be self-serving but also
because of the ease with which underlying documentation can be distorted
and falsified (Farber and Frickey 1991).
Regulation, Monopoly, and Competition
Private industry, like government, may have good reasons to prefer
regulation to the market process. As a rule, no industry offered the opportunity
to be regulated as a public utility should decline it and, historically, few
have done so (Owen and Braeutigam 1978). Regulation offers protected
markets; freedom from irksome competitors, demanding customers, and
annoying antitrust constraints; and reduced business and financial risks.
Regulated firms are in a unique position to capture pecuniary and nonpecuniary
rents that would be bid away by unfettered competition. In short,
regulation offers “the good life” to industries and firms that play the regulation
game effectively. Accordingly, industries have an incentive to strive for
regulation and, upon attaining it, to cooperate with regulators in ways that
increase the regulatory rents captured by both factions. The result is akin to
the cartelization of any industry, except that regulators use the coercive
power of the state to manage the cartel.
As in any cartel, members of a regulatory cartel often discover opportunities
to benefit themselves at the expense of their partners. Regulated firms
find opportunities to capture profits in ways that regulators would disapprove,
and so firms become selectively economical with information. Regulators
find opportunities to build political capital by heckling and coercing
firms. Possibilities for opportunistic behavior prevent a cartel from maximizing
the joint rent over the long run. So long as a modicum of discipline
and trust is maintained, however, regulation generates rents for government
and industry factions and continues until perturbed by outside forces.
Entrepreneurs too have an incentive to support regulation, at least for
other firms if not for themselves. They profit by selling into the gaps between
supply and demand created by regulatory restrictions, and by using
the machinery of regulation to hamstring competitors and to resolve disputes
between themselves and regulated firms. Regulation facilitates business
practices that otherwise would be actionable under antitrust law: tariff
requirements, for example, allow price coordination and limit price shading.
Whether an entrepreneurial firm seeks to join a regulated cartel or,
alternatively, to remain apart from it, depends on which alternative maximizes
the present value of the expected profit stream, a matter that changes
as regulatory policies and market conditions change. On the other side, a
regulatory cartel will admit new entrants only if doing so maximizes the
present value of expected future rents. If entry is inherently unsustainable, or
if it appears that entry can be made unsustainable by means of strategic
regulatory action, then a rational cartel will seek to crush entrants rather
than taking them to its breast. Hence, entrepreneurs must enter regulated
markets by force, pushing the legal limits of restrictive regulation until a
suitable market niche is created. Entry under these conditions is costly and
so is best attempted during periods of rapid technological change, when
marginal costs are falling and product improvements are possible. These
factors allow entrepreneurs to generate the cash needed to bear the burdens
of litigation and political action and the high risk of failure.
Where entry is sustainable in the long run, the market process dissipates
regulatory rents until status quo regulation is no longer worthwhile. At this
juncture, regulation passes through a reformation that marks the end of one
regulatory cycle and the beginning of another.
Telecommunications Policy in the United States
In this section of the essay, I sketch the trend of regulatory policy, focusing
on key regulatory episodes involving telephone equipment and longdistance
services. The purpose of this account is to show how policy change,
including the antitrust divestiture of AT&T in 1984 and the Telecommunications
Act of 1996, agree with the predictions of the positive theory of
regulation developed above. I shall describe how the telephone industry
evolved from an initial state of competitive chaos to become a regulated
monopoly that benefited the industry and its regulators for nearly seventy
years. As regulatory rents grew, entrepreneurs and consumers increasingly
pushed the limits of regulatory restrictions. They were aided at key points by
federal courts, which operated outside of the regulatory cartel and decided
pivotal regulatory issues by their own lights, and by public utility regulators
and legislators at different levels of government, whose divergent utility
functions caused them to act at cross-purposes with one another. Formal
moves toward regulatory reform occurred only after the capacity of regulation
to generate sustainable rents had been substantially eroded. The Telecommunications
Act of 1996 completed a cycle of creative destruction and

laid the groundwork for a new cycle of rent seeking.

Telecommunications Policy in the United States

In this section of the essay, I sketch the trend of regulatory policy, focusing
on key regulatory episodes involving telephone equipment and longdistance
services. The purpose of this account is to show how policy change,
including the antitrust divestiture of AT&T in 1984 and the Telecommunications
Act of 1996, agree with the predictions of the positive theory of
regulation developed above. I shall describe how the telephone industry
evolved from an initial state of competitive chaos to become a regulated
monopoly that benefited the industry and its regulators for nearly seventy
years. As regulatory rents grew, entrepreneurs and consumers increasingly
pushed the limits of regulatory restrictions. They were aided at key points by
federal courts, which operated outside of the regulatory cartel and decided
pivotal regulatory issues by their own lights, and by public utility regulators
and legislators at different levels of government, whose divergent utility
functions caused them to act at cross-purposes with one another. Formal
moves toward regulatory reform occurred only after the capacity of regulation
to generate sustainable rents had been substantially eroded. The Telecommunications
Act of 1996 completed a cycle of creative destruction and

laid the groundwork for a new cycle of rent seeking.


Rent seeking was not and is not just about telecommunications.It has also largely been about communications and transportation as well.During the 1950s,the entire public service vehicle system of the United States were demolished for giving way to private airlines,private vehicles etc.This was about creating needs that weren't and wouldn't have been existent otherwise.If we go by the definition of rent-seeking now,this phenomenon,too,links with it and more with the subsequent policies that were taken up by the government itself.The question is,how much wealth was demolished and how much created.Who benefitted from this? The public? The environment? The industrialists?The government? 
The industrialists did.And the government is just an intermediary in the process,the individuals in that sector,too,must have benefitted but is wealth created by creating demands that were previously inexistent?I will leave that unanswered. 

Natural Monopoly and Taxes : What Role Do They Play?

Any kind of monopoly poses a threat to its own functioning.It is quite probable that in near future,the institution,be it the government itself or be it the organisation that the government has given such rights to,will seek their own path of individualistic benefits.For this,there might be gaps in the providing of such services at the first place or the other more complex and more interesting concept of increasing expenses without having increased the cost of the components or process of production.This will then be called rent-seeking behaviour.We will now get a little deeper into this.
Gordon Tullock (1967) observed that a social cost is incurred when time and
resources are attracted into contesting available benefits or rents. The primary
concern of the literature (see Congleton, Hillman, and Konrad 2008) that
followed on from Tullock’s observation has been evaluation of the social cost
of rent seeking. With no official data on rent seeking available and contested
rents in general not observable, the approach to measurement of the social
cost of rent seeking has been through modelling the behavior of rent seekers
in the theory of contests (Konrad, 2009; Long, 2013). Empirical studies have
used the conclusions from the models to infer social costs through dissipation
of rents, usually under the assumption of complete dissipation (see Hillman,
The studies of the social cost of rent seeking have had in common the
assumption that contests occur in isolation from other sources of income and
from leisure. Yet in general rent seekers can also earn incomes in labor
markets and allocate time to leisure. The incomes are subject to taxation. We
show that when rent seekers earn – or can earn – taxable income and can
allocate time to leisure, under reasonable conditions the social cost of rent
seeking exceeds the social losses inferred from the presence of a rent-seeking
contest alone. 

There has been recognition that rent seeking is included in possible allocation of time. See
Weiss (2009). The interdependence between the social costs of rent seeking and the excess
burden of taxation has not been studied. 

The excess burden of taxation is associated with the Harberger triangle
(see Harberger, 1964; Hines, 1999). In the special case in which the
compensated labor supply is linear, the excess burden of taxation can be
measured by using a formula for the Harberger triangle that includes the tax
rate and the compensated elasticity of labor supply (for an exposition, see
Hillman, 2009 chapter 4). We use the equivalent variation to measure the
excess burden of taxation.

A rent-seeking opportunity to time allocation
options of earning taxable income or leisure. We do not introduce further time
allocation options such as home production or an informal sector, which
unlike rent seeking can be non-strategic and risk-free.with
leisure non-inferior, we obtain the quite intuitive result using the equivalent
variation that the excess burden of taxation is greater in the presence of a rentseeking
opportunity. The core intuition is that a tax on earned income
decreases the opportunity cost of leisure and when present, also of rent
seeking. Therefore time is substituted from labor to leisure but also from labor
to rent seeking. An adverse effect of a tax on earned income on a rent seeker is
that, unlike leisure, the expected return from participating in a strategic rent.
 Although the formula for the area of the Harberger triangle can be used as an
approximation for measuring the specific excess burden with infinitesimal rate of taxation,
because of the possible different direction and magnitude of errors in consequence of using
an approximation, to compare between different excess burdens, we require an accurate
measure such as the equivalent variation. On measurement of the excess burden, see Willig
(1976) and Hausman (1981). For a textbook exposition, see Hillman (2009, chapter 4).
seeking contest may not increase when substituting more time into a contest.
With identical individuals the expected return is unchanged. These effects

increase the excess burden of taxation

The Statistics of Rent Seeking

Extracted From MORE IS LESS?
James F. Dewey
Bureau of Economic and Business Research
University of Florida
Gainesville, Florida 32611

August, 1999

the adverse political effects of such changes may swamp the
gross gains entirely, making all parties worse off. This can occur because the increase in the
available surplus may increase wasteful lobbying activity and also reduce the likelihood that the
regulator will make the decision leading to the largest (gross) social value. Thus, changes in
regulatory policy that increase the gross surplus available and could therefore lead to Pareto
improvements under ideal circumstances may in fact result in Pareto inferior outcomes. For
instance, improvements in policy governing the access of potential competitors to local
telecommunications networks or electricity transmission or distribution networks that allow
potential competitors to operate more efficiently will also make the incumbents more resistant to
In the decades pnor to the deregulation of the airline, trucking, and long-distance
telecommunications industries, the growth of trade between geographically distant locations
coupled with technological advances led to their rapid growth. In the past, attempts to use the
ETR to explain the deregulation of these industries have been stymied because they appear to
have been deregulated at a time when the regulated firms were still enjoying regulatory rents
(Peltzman 1989 and Levine 1989). In my model the continued accrual ofrents to regulated firms
is not inconsistent with growing pressure for deregulation. In the model, once an industry has
grown to the point where the regulated firm is no longer the most efficient producer at the
margin, further growth increases the magnitude ofthe deadweight loss due to regulation. This in
tum increases the incentives of those harmed by regulation to lobby for deregulation by more
than it increases the incentives of the firm to lobby for continued regulation, increasing net
pressure for deregulation. Thus the very forces that sustained rents for the regulated firms may
have moved the industries toward deregulation.
The prevailing literature also demonstrates that interest groups gain when the efficiency with
which they deliver political pressure increases. I extend the analysis to show that groups with a
high cost of delivering political pressure benefit more from an increase in their opponent's
marginal lobbying cost than from an equal decrease in their own. This may help to explain why
campaign finance reform often generates more popular support than projects designed to increase
voter participation. If special interest groups generate pressure more efficiently than the general
population, limiting the power of the former may be the most effective way to improve the
welfare of the latter.

There are two primary approaches to the study of questions of economic policy in a political
environment. The first stresses the platform choices made by candidates engaged in electoral
competition. 1 The second stresses the policy choices made by a standing regulator or
government. While the first approach may provide important insights into the general direction
of public policy, the second seems better suited to the study of particular regulatory policies in
individual markets. Thus, the second approach has been most widely used to model the positive
political economy of regulatory policy, particularly by Stigler (1971), Peltzman (1976), Becker
(1983 and 1985), and other works in the tradition of the ETR. 2 In addition to its widespread
theoretical use, a large body of empirical evidence supports the notion that the ability of
interested parties to exert political pressure plays a crucial role in the determination of regulatory
policy.' Accordingly, I follow earlier works in the tradition of the ETR and model regulatory
outcomes as dependent upon the lobbying activities of affected interest groups.
A binary decision is to be made by a regulatory authority; for example whether to allow
competition in a telecommunications or electricity market or to require a license to enter some
profession. Two opposing groups seek to influence the decision. It is perhaps easiest to envision
one as a regulated firm and the other as a group of large (industrial) consumers (e.g., a Wilson
(1968) type syndicate). For example, a regulated telecommunications firm may exert pressure to
prevent competition while industrial and commercial consumers (who can perhaps take
advantage of pre-existing trade associations to organize their lobbying efforts), lobby to allow it.

The two groups will be referred to as "the Firm" and "the Consumer" for expository purposes,
but the model is applicable more generally.
The Consumer's payoff is u' if the regulator chooses its preferred outcome (the Consumer
wins) and u' otherwise (uc>u f
) . Similarly, the Firm's profits are nf if the regulator chooses its
preferred outcome (the Firm wins) and nC
otherwise (nf>n c ) . The Consumer and the Firm may
exert lobbying effort, denoted e" and e' respectively, to influence the regulatory decision.
Lobbying entails a constant unit cost of k" for the Consumer and k' for the Firm. The magnitude
of the Consumer's marginal lobbying cost may be influenced by factors such as geographic
dispersion. Legal restrictions on campaign contributions, for example, may influence the Firm's
marginal cost of lobbying. The probability that the Consumer's preferred outcome is selected is
taken as a function of both groups' lobbying efforts, denoted p(eC,ef).

Effects of Weakening of Property Rights on Rent Seeking Behaviour

A very interesting and debatable issue is the effects of the strength (and that is why weakness) of property rights on rent seeking behaviour. Now,unfortunately,only one article has been written on the same topic by someone called David John Marotta on Forbes (The link is available in the Bibliography section) and the article is anything but biased.
The article starts with "unfortunately,if property rights are weakened" . I am sure that is personally unfortunate to the author but I am not sure why has the same notion been imposed on the general public. Again,if property rights are weakened,or the economy is made a little less capitalisitc,does the rent seeking behaviour increase? That issue cannot,perhaps be answered like that.There has to be enough empirical strength behind what is to be said.
Hypothetically,suppose property rights are weakened in China (I said hypothetically) and there are not as many billionaires in Beijing as there is now,people have more capital in their hands,the wealth disparity has reduced.So,will he try to appropriate the wealth he is literally gaining from but the ownership of which he is not so sure about? It depends on the generality of psychology and administration. Let us take the examples of common property resources. Sometimes,we find the occurrence of tragedy of commons in capitalist or mixed economies.In a socialist economy,the private property rights are extremely weakened and if paired with proper administration,this tragedy can be avoided to a considerable extent. In socialist economies,most resources function like common property.So,if everybody went rent-seeking just because they were unhappy that they did not personally own it and the public owned it,we would have learnt that today.Quite sadly,history doesn't speak of anything as such.
A poor,landless labourer,who has just got a nice home for his family and three meals a day will not,all of a sudden turn into a rent-seeking industrialist.
Rent seeking in the modern world occurs within the businessmen class,in general.Not ordinary people.And this is not possible at all in case of common property resources since they are publicly owned.Anyone who lets know his consent on public goods might have to pay an amount for this consent (theoretically).So,basically,he will never do this and according to generality in psychology as well,he will not try to do this since this belongs to 50 more people,at the least,if we are even talking about a small village. There always is an element of social compulsion and be it from any perspective,the assumptions in the article are not substantial enough for consideration.

Rather,government failures such as climate change introduces rent seeking. Market failures introduce rent seeking.Not adopting the lassiez-faire policy cannot simply be used as a reason for market failures.What is even more strange is that the European Union has witnessed attempts of applying the lassiez faire system in the economy.The United States have had trememendous intervention in the economy all the time and on the contrary,they have been using market economy as logic to justify imperialism.For example,the US provides huge amounts of subsidy to the 1% of the population who practice agriculture.This is against agreements with the WTO and a reason why the underdeveloped countries subsequently fail to make good business in the international market.They have always been providing these subsidies in order to get better and better in the international market.Not to mention how statutory the "liberal trade agreements" have been.
And the invisible hand theory came through the Physiocrats,the same Physiocrats who claimed that the price of agricultural products,regardless of anything else should be high! The same physiocrats who developed these theories in the late 17th century.All of that has happened in the past is important but they were not future predictors.Just like Marx wasn't.Just like Lord Keynes wasn't.And so wasn't the so called father of Economics Adam Smith.He couldn't have known what leads to misallocation of resources in the 21st century.So,using the invisible hand theory to prove that proper allocation of resources isn't possible otherwise is quite illogical and worsely vague.
The wealth is mostly draining now,instead of being created.From Gold mines in Ghana to oil mines in Colombia,MNCs are the only organisations that are benefitting from the trade.The condition of the working class is as terrible,if not worse and unfortunately,a middle class is on the rise that is soon to be wiped out.The way the wealth is now being drained,there will be only dualism after a century may be along with the presence of a minor,lower middle class.On one side,we will see Raymond's showrooms and just beside that,an unfed beggar with a broken stick and earthen bowl.

I wonder what the author was thinking about while writing this article.I simply fail to understand what it is about.Is it about licensing that capitalism or draining of wealth or nodding our heads along with the industrialists an absolute necessity or is it about propaganda mechanism? (Ref Noam Chomsky's Propaganda Model). Ironically,such large companies like Forbes are very interested in rent-seeking.

Pareto Optimality and Rent Seeking

Figure 1

When economists say that a particular government policy or an institutional change (that is, change in the rules according to which people do business with each other) leads to a gain in efficiency they mean something very specific. They mean that under the new arrangement it would be possible to make everyone better off. That is, the gainers could compensate the losers and still have something left over. Once such efficiency gains have been fully exploited and a situation has been reached where no further efficiency gains are possible---where one person's situation can only be improved by making someone else worse off---we say that the allocation of resources in the economy is Pareto Optimal or Pareto Efficient. The concept is named after Vilfredo Pareto (1848-1923).

The production and consumption of the various goods in the economy is Pareto Optimal when the combined rents to producers and consumers are the largest that can be obtained. Since these optimal quantities produced and consumed depend on the positions of the demand curves for the various goods, and since the demand curve for any good depends on the distribution of income between those who like the good a lot and those who do not, changes in the distribution of income will affect the demand curves for the various commodities and the maximum consumer and producer rents that can be obtained by producing and consuming them. The Pareto-Efficient production and consumption levels for the commodities produced and consumed in the economy will thus depend on the distribution of income---the fact that a situation is Pareto Optimal therefore does not imply that the distribution of income at which it arises is a socially desirable one.

We have established that an important requirement for the usefulness of straight-forward supply and demand analysis is that products be competitively priced. By this we mean that each individual buyer and seller buys such a small portion of the total quantity of the good that his/her actions cannot appreciably influence the market supply or demand---hence each market participant takes the price as given. Economists call this perfect competition. If there are no externalities, then competitive pricing implies that the Pareto-Efficient quantity will be the one at which the supply and demand curves intersect. These are the quantities that will maximize combined producer and consumer rents for the particular distribution of income that leads to these supply and demand curves.

This condition that in the absence of externalities perfect competition will lead to Pareto Optimality is called the first theorem of welfare economics. While the ideas behind this theorem have been known for decades, it was made precise by Kenneth Arrow (1921-  ), and Gerard Debreu (1921-2004). Note again that this is a theorem about efficiency, not social welfare in general. There are many possible competitive equilibria since every different distribution of income will have associated with it a different Pareto-Efficient mix of goods produced and consumed. Economic efficiency involves getting to one such equilibrium---choosing an appropriate distribution of income and thereby picking the particular Pareto-Efficient equilibrium that will be the socially desirable one involves value judgments and goes beyond the scope of economic analysis.

A movement to Pareto Optimality without the gainers compensating the losers involves a redistribution of income. The new equilibrium is still a Pareto-Efficient one in the sense that, the redistribution having been made, it is now impossible for any individual to gain without someone else losing. Because of the distribution effects from moving to a Pareto-Efficient situation, the losers will frequently engage in rent seeking to prevent such a move from taking place.

If there are no transaction costs involved in making and enforcing agreements among individuals and groups of individuals and if the individual rights of all transacting parties are properly guaranteed by the legal system, then the gainers would bribe the losers to obtain their agreement and Pareto-Efficiency would occur naturally. This notion that Pareto-Efficiency will occur automatically if transactions costs are zero and gainers can always compensate losers is called the Coase Theorem (due to Ronald Coase (1910-  ). It can be illustrated with respect to the familiar externality arising from industrial smoke. The argument is presented in Figure 1. We suppose for simplicity that the social cost of production including the environmental damage from the smoke by-product is the curve  h S  while the cost of production of the industry, which pays none of the cost of the smoke damage, is  k S'.  We also assume for simplicity that smoke inhibiting devices are prohibitively costly. The demand for the product is  g D. We assume that the adverse effects of environmental damage are borne by conumers alone.

Suppose now that the system of property rights protects consumers from industrial smoke---no one has a right to produce smoke without explicit permission from those affected. In the absence of such permission the output of the product will be zero. When there are no transactions costs, however, producers can easily obtain the consent of consumers---they can agree to pay them the amount  h a u k  for the right to produce the quantity  Q0  and sell it at the price  P0.  Consumers will capture the area  g a P0  and producers will capture the rent  P0 a h.  Bargaining between producers and consumers could lead to a different split of the rent  g a h  than this, but whatever the distribution of these gains, the Pareto-Efficient output will be produced.

Alternatively, suppose that well-defined property rights exist that place no restrictions on industrial smoke. The industry will produce the output  Q1  and the market price for the product will be  P1.  Producers will earn a rent, over and above the private opportunity costs, equal to the area  P1 b k.  Consumers will earn the surplus  g b P1  minus the cost to them of the smoke damage, given by the area  h c b k.  Taking everything into consideration, the economic rent to society will be the area  g a h  minus the area  a c b.  This falls short of the maximum possible rent by the area  a c b,   which equals the area  g b P1  plus the area  P1 b k  minus the area  h c b k.

 Figure 1
When there are no transactions costs, consumers will form an association and agree to pay producers an amount sufficient to induce them to produce the output  Q0  and sell it at the price  P0,  rebating their profits,  P0 a u h,  back to the consumers' association for distribution to its members. Producers will require a payment from consumers equal to the shaded area to compensate them for the loss of rent from producing  Q0  rather than  Q1.  Given linear supply curves, this shaded area is equivalent to the area  C1 c a P0.

Since the price  P0  now reflects consumers' full costs, including the environmental costs, they directly lose the area  P0 a b P1  as compared to their previous situation. Previously they were receiving the consumer surplus  g b P1  minus the environmental costs  h c b k.  Given linear supply curves, these environmental costs can be equivalently represented by  C1 c b P1,  so that the previous net benefits to consumers could be alternatively represented as  g b P1  minus  C1 c b P1.

After bribing producers to get them to produce  Q0  at a net price  u Q0,  consumers lose, as they move from  Q1  to  Q0,  the amount they have to compensate producers  C1 c a P0  ( which is equivalent to the shaded area ) plus a reduction  P0 a b P1  in consumer surplus. In doing this they avoid the loss  C1c b P1  (which is equivalent to  h c b k)  leaving them with a net gain equal to the area  a c b.  The direct loss of consumer surplus plus the bribe to producers is less than the costs of the pollution by this area. Some of this gain will have to be shared with producers to obtain their agreement by making them better off rather than indifferent between the new and old arrangements.

When there are no transactions costs the inefficiencies resulting from price collusion among firms will also disappear, even if collusive agreements are enforceable in the courts. Consumers will simply pay cartels slightly more than the amount of their profits from collusion in return for their agreement to price competitively.

Given zero transactions costs, Pareto-Optimality will be attained as long as the government allows people to make the necessary agreements. The distribution of income will depend on the initial property rights before these agreements take place. But no matter what the initial situation, agreement will take place and Pareto-Optimality will be achieved as long as property rights are clearly defined and enforced.

The problem is, of course, that transactions costs are not zero. One or two firms may agree on a strategy, but it will be impossible to get a large number of consumers to agree on the payment or compensation for each consumer. There will always be hold-outs who will try to obtain a greater share of the rents. As a result, the Coase Theorem will not be applicable to most situations---the importance of the theorem is in its delineation of the appropriate roles of transactions costs and property rights in the achievement of Pareto-Efficiency. Property rights are important because individuals cannot make agreements unless they have the legal right to do so and any such agreements are legally enforceable. The particular property rights established in any situation also determine the distribution of income.

Because transactions costs are often large, Pareto-Efficient outcomes frequently cannot be achieved by private transactions. The government can often produce a Pareto-Optimal situation by intervening---for example, the optimal degree of pollution in Figure 1 can be engineered by putting a per-unit tax on output equal to  a u.  The trouble is that transactions costs of handling social problems through government are also not zero. Producers will lobby against the tax. Environmental groups will lobby in favor of it. The policies of the government will most often be determined by the effectiveness of the rent-seeking activities of the gainers and losers from government action---this will be determined, in turn, by whether transactions costs are lower for the gainers or for the losers.

The above extraction from a lecture documented from the Economics department of University of Toronto,we understand a little bit of how this interlinks with the public choice theory.The tighter is the condition of Pareto optimality,the more will be the propensity of rent seeking.Again,who will gain or loose will depend upon the transaction costs involved.This is indeed a very complex process.

How To Keep Telecoms From Engaging Into Destructive Rent Seeking Behaviour

The truth is,a businessman will sell commodities in order to make profit,not for social welfare.This is because business is a social activity based on historically evolved social rules,which are indifferent to everyone,or have generality in implication.Similarly,tendencies of rent-seeking behaviour are somewhat expressions of profit-seeking motives,however unjustified to the society.This might not be a social activity but this is a propensity that has been aroused within the industrialists.In fact,the propensity of expansion is very clearly visible in all the market and non-market activities taking place in a globalised world as ours.
The question of the hour is how to curb these tendencies.There are two ways of doing this,I think.
First things first.This is not possible with the help of the government in a market economy.The profit motive does not,of course help in curbing the profit motive itself.So,one option is basing things on the social motive,instead of capitalist intentions.
The other option is knowledge.If a large number of people know the truth,the functioning of this can be,at least as can be thought hypothetically,reduced.
There is resultant tax burdening on people,at first and then there is a large,large gap filled with tax dodging agencies in market economies.They often also have monopoly in business,for example in India,e-marketing is getting into hands of two to three sellers only and all of them are running at the cost of public services,including Flipkart,Amazon India etc.
At one side,we are loosing the quality of public services,our telecommunication costs are often rising without many people having a hint of the reason that there is no reason at all except for propensity to gain and our small scale industries are suffering more than ever.
The answer to all of this is definitely not something that can be solved with the help of the invisible hand.This is only resulting in a wealth drainage that is highly undesired.In turn,since the disparity is increasing,the condition of indigenous industries is getting worse.The dualism element is increasing.
In India,BSNL (Bharat Sanchar Nigam Limited) has been providing most of its available technology to other foreign or private companies these services in exchange of costs. And the 2G scam has only resulted in exposing the truth in front of our eyes. The communication costs have been on the rise since then,even at times there has been absolutely no inflation or unavailability of resources or scarcity in labour.
The answer to this is now in the hands of the people.In case of public choice theory,not much can be done with the help of measures.If there is reach of the necessary information,we can get closer to the anti-motive of rent-seeking.
Theoretically,if we are trying to remove the profit motive,we have to find out something we have to replace it with,preferably something that compliments it,the social motive.But that is not only about this particular issue,it is about several similar issues accumulated together.We need an alternative body to guide us through political consciousness and subsequent actions.That is what works in case of public choice theory.
One thing is that since telecommunications is a medium for the operation of propaganda model,the rent seeking will not be destructive enough until democracy even theoretically exists.If a drearier future lies ahead of us and if we are really going back to the political condition in France before 1789,then may be after a few centuries,only those who can purchase it will telecommunicate.For now,the doers can be us.
The key now rests in the hands of consciousness and dissidence.


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