SLIDE 1: TITLE PAGE

Government Failure: RENT-SEEKING, REGULATORY CAPTURE and FAVORITISM

SLIDE 2: PRESENTATION OVERVIEW

a) What is Government Failure

b) Rent-Seeking

c) Regulatory Capture

d) Favoritism

e) Examples

SLIDE 2:

WHAT IS GOVERNMENT FAILURE?

Government failure is commonly defined as a situation where government intervention in the

economy creates inefficiency and leads to a misallocation of scarce resources.

Public choice economics consider government failure as the economic distortions caused by the
policies of governments (Gilpin, 2001)

SLIDE 3 RENT SEEKING

Rent-seeking is a behavior that is aimed to increase one’s existing wealth without creating new
wealth for others.

Rent-seeking refers to the use of a resource to obtain a surplus over the normal economic return to
that resource. (Gilpin, 2001)

Rent- refers to the benefit created by the government/ wealth gotten through manipulation

SLIDE 4: RENT SEEKING AS GOVERNMENT FAILURE

There are three important characters in rent-seeking

a) Rent-seeker-Corporation, Businesses, Trade Union, Firms, Industries

b) Rent-provider- Government

c) Rents- Tariffs, quotas, subsidies, regulation, grants, licensing

SLIDE 5:

HOW DOES THE RENT-SEEKING WORKS?

a.) Lobbying- refers to any attempt by individuals or private interest groups to influence the
decisions of government.

B.) Bribery- refers to the act of promising, giving, receiving, or agreeing to receive money or some
other item of value with the corrupt aim of influencing a public official

The rent-seeker spend money to hire a lobbyist in order to persuade a government official to enact
or change regulations that would in favor with their business, instead of spending money for
improving their product.
SLIDE 6:

EXAMPLES OF RENT AND ITS EFFECTS

a.) Tariffs- Tariffs is a tax imposed on imports and exports by government

 Tariffs can make domestic industries less efficient and innovative by reducing competition.

 Tariffs can hurt domestic consumers since a lack of competition tends to push up prices.

b.) Quotas- A quota is a government-imposed trade restriction that limits the number or monetary
value of goods that a country can import or export during a particular period.

 Quotas can make domestic suppliers gain more revenue

 Consumers pay a higher price

 Less government revenue

SLIDE 7:

EXAMPLES OF RENT-SEEKING

c.) Subsidies- Subsidies are payments, tax breaks, or other forms of economic support given by
governments to certain industries or economic sectors. With subsidies, consumers are able to access
cheaper products and commodities.

 Subsidies can shorten the supply

 Subsidies can increase tax

d.) Economic Regulation

 Economic regulation refers to rules that limit who can enter a business (entry controls) and
what prices they may charge (price controls)

SLIDE 8:

RENT-SEEKING AND CORRUPTION

Corruption is a situation where ‘‘the power of public office is used for personal gain in a manner that
contravenes the rules of the game’’

The corrupt politicians utilize their bureaucratic power to engage in rent-seeking activities. In order
to gain certain benefits, the rent-seekers may bribe politicians.

Tullock’s Paradox

- The Tullock’s Paradox states that rent-seekers generally obtain large financial and economic gains
at an enormously small cost.

SLIDE 9:

THE LOPEZ FAMILY OF ILOILO

The Lopez Family of Iloilo is one of the most influential families in the Philippines.

Lopez known for presidential patronage and using their resource to support a candidate was a high
likelihood of setting in Malacañang
SLIDE 10:

SUGAR INDUSTRY IN US

The sugar industry in US maintains high profits because of the existence of import quotas. The end
result is that sugar is about twice as expensive in the US as in neighboring countries

Since the sugar industry gets such great benefits, sugar companies spend a lot of time and effort on
politicians to make sure the import quotas stay in place.

SLIDE: REGULATORY CAPTURE

SLIDE 1: WHAT IS REGULATORY CAPTURE?

Regulatory Capture occurs when regulators act in ways that benefit the people they are regulating,
not the people who are supposed to benefit from regulation.

SLIDE 2: PUBLIC INTEREST THEORY vs. REGULATORY CAPTURE THEORY

PUBLIC INTEREST THEORY

Public Interest Theory argues that government regulation promotes the general welfare rather than
the interests of well-organized stakeholders.

Regulation as the necessary exercise of collective power through government: (Levine and Forrence,
1998)

a) to cure market failure

b) to protect the public from such as monopoly behavior
c) to protect from destructive competition
d) to protect from the abuse of private economic power
e) to protect from externalities

SLIDE 3:

REGULATORY CAPTURE THEORY

Regulatory Capture Theory holds that no matter what the intent of the regulators, those who are
supposed to be regulated will end up controlling the regulatory agency.

Capture theory describes actors in the regulatory process as having narrow, self-interested goals
(Levine and Forrence, 1989)

SLIDE 4:

Regulatory capture is a form of bias exhibited by a regulator.

Here are a few of the things that can drive bias, or at least perceptions of bias:

a) viewing the parties being regulated as customers

b) working closely with regulated parties.
c) receiving gifts from regulated parties.
d) employing staff from the regulated industry.
Slide 5: FORMS OF REGULATORY CAPTURE

FINANCIAL CAPTURE

when the motivation of the regulatory agent is of a material nature, and may result from bribes,
contributions and political donations, etc. Tends to occur in countries with authoritarian political
systems or fragile democracies

CULTURAL CAPTURE

when the regulator begins to think like the firms in the regulated sector, reflecting a strong social
identification with it. Tends occur in countries with higher levels of economic and social
development.

SLIDE 6: CAUSES OF REGULATORY CAPTURE

a) Regulator
b) Information Asymmetry
c) Inefficiencies of Public Sector
d) Corruption
e) Under-Resourced Regulators
f) Self-Interest

SLIDE 7:

COMMON INDUSTRIES INVOLVE IN REGULATORY CAPTURE

A.) Environmental

Environmental Protection Agency

Under President Donald Trump, federal agencies are showing ever-increasing signs of regulatory
capture. The Environmental Protection Agency (EPA), under former Administrator Scott Pruitt and
Administrator Andrew Wheeler, has been a poster child for an agency captured by a well-connected
regulated industry.

A recent article in the American Journal of Public Health described EPA’s many signs of regulatory
capture.

 Pruitt’s political career was bankrolled by the oil & gas industry.

 Wheeler was a lobbyist for the coal industry.

 Most of EPA’s political staff is closely tied to the fossil fuel industry

 EPA restructured its scientific advisory boards to marginalize independent researchers and
allow industry lobbyists greater influence.
SLIDE 8:

COMMON INDUSTRIES INVOLVE IN REGULATORY CAPTURE

B.) Finance

Federal Reserve Bank of New York

The New York Fed is the most influential of the Federal Reserve Banking System in US. One of New
York Fed’s responsibilities is the regulation of Wall Street. However, its president was allegedly
controlled by the chief executives of the banks it supposed to oversee

C. Transportation

Interstate Commerce Act

The ICC is regarded as a classic example of regulatory capture, in which regulators enact rules in
favor of the regulated industry. After the Interstate Commerce Act went into effect in the late
nineteenth century, railroad barons overtook the Interstate Commerce Commission (ICC)

SLIDE 9:

Allegedly Captured Agency in the Philippines

a) National Telecommunications Commission (NTC)

b) Department of Environment and Natural Resources (DENR)
c) Energy Regulatory Commission (ERC)
d) Land Transportation Franchising and Regulatory Board (LTFRB)

SLIDE: FAVORITISM

SLIDE 1:

WHAT IS FAVORITISM

Generally, Favoritism is the practice of giving unfair preferential treatment to one person or group at
the expense of another

Government Favoritism or also known as political favoritism or cronyism refers to the practice of a
government showing preferential treatment or granting advantages to individuals, businesses, or
groups based on personal relationships, political affiliations, or other non-merit factors rather than
objective criteria.

SLIDE 2: Government Favoritism toward particular firms comes in many firms such as;
(Mitchell et al, 2019)

 Direct Loans
 Subsidies
 Bailouts
 Tax Breaks
 Government-Created Monopoly
 Regulatory Barriers to Domestic Competition
 Tariffs and Quota on Foreign Competition
SLIDE 3: CONSEQUENCES OF FAVORITISM (Mitchell et al, 2019)

 It stunts economic growth

 It encourages corruption
 It violates standard notions of justice
 The culture of favoritism is expensive to taxpayers and consumers
 It undermines the public’s faith in markets and economic freedom
 If such attitudes persist or expand, then free, open, and competitive markets may be in peril.