Rent-seeking and optimal regulation in replenishable resource industries

Abstract

In this paper, wasteful rent-seeking behaviour has been shown to have important implications for the determination of the welfare maximizing regulatory policies of replenishable natural resource industries. In general, the incorporation of wasteful rent-seeking activity into the analysis leads to policies which suggest a greater level of industry output than has been advocated by tradition policies that do not take rent-seeking into account. Our analysis therefore supports a more laissez faire policy than has been recommended in the literature. Specifically, we find that when rents are completely dissipated by wasteful rent-seeking activity (t=1), the role of the regulator is simply to guarantee biological efficiency, should this be threatened by the economic equilibrium achieved by the free-access of firms. One of two possibilities can occur. In the first, the economic equilibrium determined by the free-access of firms is biologically efficient, i.e., the equilibrium steady state of the replenishable natural resource exceeds or is equal to the maximum sustainable yield stock size (x MSY ). If this occurs, the regulator needs to take no action whatsoever. In the second case, the economic equilibrium generated by the free-access of firms does not yield biological efficiency. The equilibrium is characterized by a steady state stock of the natural resource that is smaller that the maximum sustainable yield stock size, namely (x MSY > x MSY ). In this case, therefore, the regulator does need to intervene, but his best policy takes the simple form of setting the total quota equal to the maximum sustainable yield (MSY) of the resource. Thus, while the results are to some extent consistent to those derived by Buchanan for the regulation of externalities, the fact that we are dealing here with replenishable resources adds a further dimension to the issue and changes some of the policy implications. Copyright Kluwer Academic Publishers 1988