Call Us: US - +1 845 478 5244 | UK - +44 20 7193 7850 | AUS - +61 2 8005 4826

Job Security Provisions and Employment.

A simple example is a city that imposes a high official meter rate for taxis but allows free entry into the taxi business. The fare must cover the cost of paying a driver plus a market rate of return on the capital costs involved. Labor and capital will flow into the cab industry until each ends up getting its expected, normal return instead of the high returns one would expect with high fares. What will adjust is simply the number of cabs and the fraction of the time they actually carry passengers. Cabs will get more for each rider, but each cab will have fewer riders.

Other situations of rent seeking occur when artificially high urban wages attract migrants from rural areas. If the wage does not adjust downward to equate supply and demand, the rate of urban unemployment will rise until further migration is deterred. Still other examples are in banking and drugs. When the “margin” in banking is set too high, new banks enter and/or branches of old ones proliferate until further entry is deterred. Artificially maintained drug prices led, in several Latin American countries (Argentina, Chile, and Uruguay before their major liberalizations of recent decades), to a pharmacy on almost every block.

Rent seeking also occurs when something of value (like import licenses or radio/TV franchises) is being given away or sold below its true value. In such cases potential buyers often spend large amounts “lobbying” to improve their chances of getting the prize. Indeed, a broad view of rent seeking easily covers most cases of lobbying (using real resources in efforts to gain legislative or executive “favors”).