March 21, 2018 

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COMPANY TOWN: A small town closely associated with the production activity by a single firm. The firm is typically the only employer in the town and most of the goods and services sold throughout the town are provided by this firm. Company towns were quite prevalent in the late 1800s and early 1900s during the U.S. industrial revolution, often affiliated with a large mining, lumber, or manufacturing facility that was isolated from major urban areas. The company literally built a town around this facility to provide support services for their employees. The downside, however, was the lack of competition for both the employment of labor (monopsony) and the provision of consumer goods (monopoly). In some cases, the controlling firm exploited its market control creating circumstances not but different from slavery. Such company towns were a key motivation from the formation of labor unions.

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The inclination of everyone who is alive and breathing to get as much extra income, wealth, profit, or satisfaction as they can. Rent, while technically considered the factor payment for the use of land resources, is also commonly used as a synonym for economic profit, for the acquisition of benefits above opportunity cost. Rent seeking is the entirely rational process of obtain as much "extra" as possible. In effect, rent seeking is nothing more than utility maximization. Efficiency problems can arise, however, when rent seeking is enhanced and enabled through market control, political influence, or actions of special interest groups.
Rent seeking is the rational pursuit of extra benefits above costs, of obtaining the most for the least, of getting as much profit, income, satisfaction, or utility as humanly possible. The motivation to seek rent is basically the standard pursuit of utility maximization. The rent seeking term is most often used who those doing the seeking have some degree of control over the process, especially through market control or political influence.

For example, if Lilith Quirkenstone, a working class woman barely able to make it from one paycheck to the next, purchases a basket of goods that generates the highest level of satisfaction given her limited income, then she is maximizing utility. However, if Mona Mallard, owner and President of Mona Mallard Duct Tape Industries contacts her long-time friend, Victor Thurgood, who also happens to be Mayor of Shady Valley and frequent recipient of campaign contributions, and requests that he overturn a new environmental regulation that might hurt her bottom line, then she is rent seeking.

The difference rests not so much with the motivation as with the ability to influence the process so that as much "rent" is extracted from the process as possible.

Economic Rent

This rent-seeking concept stems from the idea of economic rent. Rent itself is consider the factor payment for the use of land resources. In the early study of economics, land was considered a somewhat passive resource, a resource that wasn't actively involved in the production process like labor and capital. Hence the rent paid for the use of land was viewed as a "extra" payment.

The modern study of economics recognizes the importance of land as a factor of production and that rent is an important factor payment to compensate for the opportunity cost of using land. The phrase "economic rent" is holdover from this early view and is used in reference to a payment received by a resource over above the opportunity cost.

Economic rent is almost synonymous with the term profit. If there is a difference, profit is the revenue received over and above the opportunity costs of all resources combined, and economic rent is the revenue received over and above the opportunity cost of one resource.

People are said to be rent seeking when they try to get revenue (or other benefits) over and above their opportunity cost, the minimum they would be willing to accept.

Utility Maximization

Rent seeking is really nothing more than the motivation to maximize utility. Utility maximization is simply the process of choosing among options that provide the highest possible level of satisfaction. This satisfaction can result from consuming goods (eating a Hot Fudge Bananarama Ice Cream Sundae) or from other activities (enjoying a multi-hued sky as the sun sets below the horizon). People prefer more to less. They are motivated to obtain as much as they can. The seek out economic rent.

Because choices have consequences, utility maximization is really all about weighing benefits and costs. Choices are based on comparing the benefits generated with the opportunity costs foregone. The decision to consume a Hot Bananarama Ice Cream Sundae is based on a comparison of the satisfaction obtained with the satisfaction foregone by NOT consuming other goods that were NOT purchased with the income used for the sundae. The decision to enjoy a sunset is based on a comparison of the satisfaction obtained with the satisfaction foregone by NOT spending time pursuing other activities.

Public Choice Inefficiency

A primary concern with rent seeking arises from the study of public choice. Public choice identifies assorted inefficiencies in the government (or public sector) based on decisions (or choices) made in the political arena by votes, nonvoters, politicians, and government employees. Some degree of government ineffiency arises from rent-seeking behavior among the players in the political game.

The inefficiency, however, arises not from the rent-seeking motivation, but from the ability to achieve success. Motivated by the maximization of utility, elected politicians are well-known rent seekers. They tend to be more successful in this pursuit than others because their leadership positions provide greater abilities.

Special interest groups also seek rent. And to the degree they are able to influence elections, public policies, and the actions of politicians, they too have greater abilities to acquire economic rent.

The inefficiencies of successful rent seeking are two-fold. First, the existence of any economic rent, any revenue over and above opportunity cost, is an indication of inefficiency. A "perfectly" efficient economy would have NO economic rent. Second, the process of seeking rent often leads to actions that disrupts what might otherwise be an efficient allocation of resources. That is, resources employed to seek out rent from the political arena (such as lobbyists) are not being used for other types of productive activity (such as making cars). Society receives less production from a given resources.


Recommended Citation:

RENT SEEKING, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2018. [Accessed: March 21, 2018].

Check Out These Related Terms...

     | public choice | government failures | voting rules | rational ignorance | rational abstention | principal-agent problem | voting problems | special interest groups | government bureaucracies | political entrepreneurs |

Or For A Little Background...

     | market failures | government functions | market control | profit | opportunity cost | public finance | efficiency | public sector | private sector | utility maximization | market efficiency | land |

And For Further Study...

     | median voter principle | logrolling | voting paradox | capture theory of regulation | Tiebout hypothesis |

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