Question

Choose one real-world example of combining public choice and rent seeking to evaluate and why do you think your example is a combination of public choice and rent-seeking?

Answer 1

The concept of “rent-seeking” was a central part of the “public choice school” of economics that was developed by James Buchanan and one of his main co-authors Gordon Tullock.

In [public choice] economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. One example is spending money on political lobbying in order to be given a share of wealth that has already been created.

The net effect of rent-seeking is to reduce total social wealth, because resources are spent and no new wealth is created. It is important to distinguish rent-seeking from profit-seeking. Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth.

Here’s how rent-seeking applies to the current controversy over natural gas exports.

Thanks to advanced drilling technologies (hydraulic fracturing and horizontal drilling), and private risk-taking investors, private oil and gas companies tapped into an ocean of shale gas in America that by some estimates is enough to supply our natural gas demand for the next 100 years. But along with the enormous shale gas bonanza came a hard economic reality – the ocean of shale gas lowered spot prices below the cost of production for many producers, especially the smaller ones. Not to worry though. At such low prices, America’s abundant, cheap natural gas is easily marketable overseas, where prices are frequently many times higher than in the US (4-5 times higher in some cases). Thus, the natural, market-based solution is for U.S. gas producers to sell their very marketable product overseas to eager buyers in Asia and Europe. That’s the way the market works, and that’s the beauty of the global economy – both buyers and sellers get access to foreign markets, resulting in lower prices for consumers and higher prices for producers, with overall net gains and a higher standard of living.

But here’s where rent-seeking enters the picture. Energy-intensive US manufacturing companies like Dow Chemical, Nucor (the country’s largest steel producer) and Alcoa have benefited significantly from historically low natural gas prices, and want to restrict natural gas exports through the political process, to protect their lower energy prices and higher profits. They like the “unfettered” profits they enjoy because of lower energy costs, but they want to prevent the “unfettered” exports of natural gas by the companies that have produced that “wealth.” In public choice terms, Dow, Nucor and Alcoa are now devoting resources to influence public opinion and the political process “in order to be given a share of wealth that has already been created” by oil and gas producers.