chapter6 (2) - 2. Rent Seeking Because of the gains...

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2. Rent Seeking Because of the gains associated with owning a quota license, firms have an incentive to engage in inefficient activities in order to obtain them. How licenses are allocated matters. 1.a.If licenses are allocated in proportion to each firm’s production, Home firms will likely produce more than they can sell just to obtain the import licenses for the following year. 1.b. Firms might engage in bribery or other lobbying activities to obtain the licenses. Some suggest that the waste of resources devoted to rent seeking could be as large as the value of the rents themselves, c. If rent seeking occurs, welfare loss of quota is: Fall in consumer surplus -(a+b+c+d) Rise in producer surplus +a Net effect on Home welfare: -(b+c+d) This loss is larger than a tariff. It is thought rent seeking is worse in developing countries. 3. Auctioning the Quota The government of the importing country to auction off the quota licenses. In a well-organized, competitive auction, the revenue collected should
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This note was uploaded on 02/16/2012 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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chapter6 (2) - 2. Rent Seeking Because of the gains...

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