notes4 - L Karp International Trade September 2000 Part 4...

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Figure 1 Deadweight loss and rent/revenue L Karp International Trade September 2000 Part 4 Notes Revenue and Rent seeking: an application of the HOS model. Revenue/Rent seeking Real resources are used to "capture" the rent from quotas or the revenue from tariffs. This activity is known as rent or revenue seeking. Resources that are used in rent/revenue seeking cannot be used for other, productive activities. Economists distinguish between the efficiency and the distribution effects of policies, such as quotas. Figure 1 shows the effect of a quota of q, or equivalently of a tariff of t, in a partial equilibrium model. The triangles a and b show the deadweight loss - the efficiency effect of the policy. The rectangle R shows the quota rent or tariff revenue. (In this partial equilibrium setting the tariff and quota lead to the same equilibrium result: they are equivalent.) If this revenue is distributed in some way which does not encourage people to spend resources to obtain it, then R is a "pure transfer" and does not represent an efficiency loss. However, if it is possible to compete for R, then individuals would be willing to spend up to the amount R to obtain that amount. The amount of resources spent in obtaining the rent or revenue represents an efficiency loss, since it means that resources are being spent over the division of the pie, rather than on the creation of something useful. Thus, the real cost, in this partial equilibrium model, may be as high as a + b + R, which is much larger than a+b. By ignoring rent/revenue seeking, we may vastly understate the costs of trade restrictions or of other distortionary policies . . "Revenue seeking" occurs if the policy is a tariff, and "rent seeking" if the policy is a quota. Sometimes, these two terms are used interchangeably, but you should be aware that tariffs and quotas may not be equivalent in a general equilibrium setting -- so it is best to make the distinction between the two clear. When we say that 50% of the revenue is A sought @ we mean that individuals are willing to hire and pay for $0.5 worth of resources in order to capture $1 worth of revenue. A Full revenue seeking @ means that there are 0 profits in the revenue seeking sector. That means that people would hire $1.0
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4:2 worth of resources in order to capture $1.0 worth of revenue. If 0% of the revenue is sought, it means that it is not necessary to devote any resources (or at least any resources that have a positive opportunity cost) to the capture of that revenue. (Hey, I didn’t invent this terminology.) We will begin by examining a model in which all of the revenue is "sought". This means that if, for example, the revenue is R, individuals are willing to spend R to capture it. (Possible confusion with notation: Here I use R to denote the amount of tariff revenue or quota rents.
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This note was uploaded on 08/01/2008 for the course ARE 201 taught by Professor Karp during the Fall '07 term at Berkeley.

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notes4 - L Karp International Trade September 2000 Part 4...

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