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

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern