On Perfect Rent Dissipation

Abstract

If economists are united on anything, it is the proposition that monopoly prices reduce economic welfare by preventing the realization of the maximum gains from trade in any market. The extent of such distortions to efficiency are often called Harberger costs after Arnold Harberger's 1954 provocative attempt to measure the extent of these losses in the U.S. economy. More recent analysis has revealed that when monopoly power is achieved via regulation, at least part of the monopoly rents so gained will not be simple transfers from consumers to producers, but will be dissipated by producers' rent-seeking activity. Since such activity employs real resources, there are additional costs to monopolization beyond the Harberger costs as emphasized by Gordon Tullock (1967) and Richard Posner (1975). Indeed, Posner and others have argued that if competition for the monopoly rents is perfect, all of the expected rents from regulation will be converted to welfare losses. While Franklin Fisher's 1985 comment has qualified this conclusion somewhat, the upshot of the debate is that the rent-seeking, or Tullock, costs, may greatly exceed the Harberger costs.1 Another recent strand of the analysis concerns the time pattern over which monopoly returns are dissipated by competition to gain and hold the monopoly right. Robert McCormick et al. (1984) emphasize that to the extent such expenditures are sunk, they are forever lost and not recoverable by deregulation. While conceding the point, Martin Cherkes et al. (1986) argue that most rentseeking expenditures are recurring, not sunk, and therefore large gains from deregulation remain. The purpose of this essay is to point out that, recurring or sunk, even the largest specification of the Harberger and Tullock costs of regulatory monopolization may fall far short of the actual welfare costs. This is because the analysis concentrates on the rent-seeking Tullock costs and largely ignores the parallel rent-defending2 Tullock costs. A proper assessment of such rent-defending Tullock costs might more than double the maximum welfare costs of regulation suggested by Posner.

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