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Lobbying and welfare: a comment
Journal
of Public Economics
16 (1981) 391-394.
LOBBYING
AND
North-Holland
WELFARE:
Publishing
Company
A COMMENT
G. TULLOCK Virginiu
Polytechnic Institute,
Received January
Blacksburg,
1981, revised version
VA 24061, USA
received April 1981
To someone like myself who has not kept up with the latest developments in the economics of foreign trade, Bhagwati’s (1980) article is superficially puzzling. On his fig. 1 (reproduced here as fig. 1) the citizens of the country imposing the protective tariff are stated to be better off at point P: than at point P,. Since Pi is interior from the standpoint of P, and any combination of goods consumed by the citizens producing at Pi can be purchased by citizens producing at P, with something left over, this at first puzzled me. A little reading of the foreign trade literature, together with consultation cleared up the problem for me. I now understand how with colleagues,’ Bhagwati got his results. Implicit in Bhagwati’s reasoning is a third good: the society not only revenue to which the tariff produces X, and X,, but also government contributes. The citizens may be better or worse off at point Pi but the government will be better off. In the unlikely event that the government rebate the whole tariff revenue to the citizens, or if it spent the revenue on something the citizens valued equally with the two real goods, the citizens would be better off. Bhagwati is writing in the tradition of the foreign trade literature. The three papers he criticizes [Tullock (1967); Krueger (1974); McCulloch (1979)] were all concerned with essentially the public choice problem of government processes. Tariffs were brought up as only one illustration of a more general phenomena. They were interested in one particular aspect of government, i.e. lobbying, and tariffs are, of course, one of the many areas where lobbying is important. If tariffs are discussed, however, some revenue will be derived and any statement about the welfare effects of the tariff and its associated rentseeking, if there is such rent-seeking, must take it into account.’ Bhagwati ‘Jonathan J. Pincus and Ivor Pearce. ‘Bhagwati is attempting to get the term ‘rent-seeking’ shifted to ‘directly unproductive profit seeking, DUP (pronounced dupe)‘. I do not like rent-seeking as a term and would agree that this revision of the language would be an improvement, but I suspect that it is too late to make the change now.
0047-2727/81/0000-0000/$02.75
0
1981 North-Holland
392
Q
GOOD
Bt W
“X,
BR
Fig. I.
implicitly assumes that this money is expended in some way so that there is no waste. In public finance the contrary simplifying assumption that all government taxes arc simply wasted has freyucntly been used. 1 can see no strong argument for one simplification rather than the other. In reality, however, the government is apt to have some level of efficiency between these two. If the government were highly efficient, it would never have adopted the protective tariff since there are surely less inefficient ways of obtaining the same revenue and/or distributional results3 An efficient government which found itself at P, could use various domestic policies to reach some point inside production frontier A-B which is superior to P:. If all else failed, it could physically destroy production facilities specialized for production of good X, so as to obtain a new production frontier which was tangent to the new price level above and to the right of P:.
G. Tullock, Lohhying
and welfhre: A comment
0
393
B
GOOD
X,
Fig. 2.
If we make the realistic assumption that the government does not spend the revenue derived from the tariff with perfect efficiency, then the area of ‘beneficial lobbying’ shown on Bhagwati’s fig. 2 (reproduced as fig. 2) shrinks, and can very easily totally disappear.4 Indeed, as a specialist in the area of government performance I would be very surprised if even a single case in which the outcome is beneficial could be found. I, of course, agree with Bhagwati that the only way to be sure would be detailed empirical research covering every single case. Granted, however, that we know the government does not use cost-benefit calculation simply because it has adopted a protective tariff,5 it is not too likely that the expenditures will be wisely made. Altogether, the assumption that the government is perfectly efficient in expenditure, made implicitly by Bhagwati but not by Tullock, Krueger, or McCulloch, is at best, a way station. “Bhagwati and Srinivasan (1980) discuss one particular type of inefficient expenditure of tariff revenue, i.e. the situation where the existence of this revenue leads to further rent-seeking. This article, which appeared after Bhagwati (1980) was actually written first (personal correspondence with Bhagwati) but published later, with the result that I actually wrote the first version of this comment without having seen it. There are, of course, many other forms of government inefficiency. ‘There are cases where even a protective taritl will raise national income, albeit at the cost of lowering world income. Bhagwati’s small country assumption rules this out, however.
394
G. Tullock,
Lobbying
and welfare:
A comment
References Bhagwati, Jagdish, 1980, Lobbying and welfare, Journal of Public Economics 14, 355-363. Bhagwati, Jagdish N. and T.N. Srinivasan, 1980, Revenue seeking: A generalization of the theory of tariffs, Journal of Political Economy, no. 6, December. Krueger, A.O., 1974, The political economy of the rent-seeking society, American Economic Review 64, 3, 291-303. McCulloch, Rachel, 1979, Trade and direct investment: Recent policy trends, m: R. Dornbusch and J. Frenkel, eds., International economic policy: Theory and evidence (Johns Hopkins Press, Maryland) 766105. Tullock, Gordon, 1967, The welfare costs of tariffs, monopolies, and theft, Western Economic Journal 5, 224232.
of Public Economics
16 (1981) 391-394.
LOBBYING
AND
North-Holland
WELFARE:
Publishing
Company
A COMMENT
G. TULLOCK Virginiu
Polytechnic Institute,
Received January
Blacksburg,
1981, revised version
VA 24061, USA
received April 1981
To someone like myself who has not kept up with the latest developments in the economics of foreign trade, Bhagwati’s (1980) article is superficially puzzling. On his fig. 1 (reproduced here as fig. 1) the citizens of the country imposing the protective tariff are stated to be better off at point P: than at point P,. Since Pi is interior from the standpoint of P, and any combination of goods consumed by the citizens producing at Pi can be purchased by citizens producing at P, with something left over, this at first puzzled me. A little reading of the foreign trade literature, together with consultation cleared up the problem for me. I now understand how with colleagues,’ Bhagwati got his results. Implicit in Bhagwati’s reasoning is a third good: the society not only revenue to which the tariff produces X, and X,, but also government contributes. The citizens may be better or worse off at point Pi but the government will be better off. In the unlikely event that the government rebate the whole tariff revenue to the citizens, or if it spent the revenue on something the citizens valued equally with the two real goods, the citizens would be better off. Bhagwati is writing in the tradition of the foreign trade literature. The three papers he criticizes [Tullock (1967); Krueger (1974); McCulloch (1979)] were all concerned with essentially the public choice problem of government processes. Tariffs were brought up as only one illustration of a more general phenomena. They were interested in one particular aspect of government, i.e. lobbying, and tariffs are, of course, one of the many areas where lobbying is important. If tariffs are discussed, however, some revenue will be derived and any statement about the welfare effects of the tariff and its associated rentseeking, if there is such rent-seeking, must take it into account.’ Bhagwati ‘Jonathan J. Pincus and Ivor Pearce. ‘Bhagwati is attempting to get the term ‘rent-seeking’ shifted to ‘directly unproductive profit seeking, DUP (pronounced dupe)‘. I do not like rent-seeking as a term and would agree that this revision of the language would be an improvement, but I suspect that it is too late to make the change now.
0047-2727/81/0000-0000/$02.75
0
1981 North-Holland
392
Q
GOOD
Bt W
“X,
BR
Fig. I.
implicitly assumes that this money is expended in some way so that there is no waste. In public finance the contrary simplifying assumption that all government taxes arc simply wasted has freyucntly been used. 1 can see no strong argument for one simplification rather than the other. In reality, however, the government is apt to have some level of efficiency between these two. If the government were highly efficient, it would never have adopted the protective tariff since there are surely less inefficient ways of obtaining the same revenue and/or distributional results3 An efficient government which found itself at P, could use various domestic policies to reach some point inside production frontier A-B which is superior to P:. If all else failed, it could physically destroy production facilities specialized for production of good X, so as to obtain a new production frontier which was tangent to the new price level above and to the right of P:.
G. Tullock, Lohhying
and welfhre: A comment
0
393
B
GOOD
X,
Fig. 2.
If we make the realistic assumption that the government does not spend the revenue derived from the tariff with perfect efficiency, then the area of ‘beneficial lobbying’ shown on Bhagwati’s fig. 2 (reproduced as fig. 2) shrinks, and can very easily totally disappear.4 Indeed, as a specialist in the area of government performance I would be very surprised if even a single case in which the outcome is beneficial could be found. I, of course, agree with Bhagwati that the only way to be sure would be detailed empirical research covering every single case. Granted, however, that we know the government does not use cost-benefit calculation simply because it has adopted a protective tariff,5 it is not too likely that the expenditures will be wisely made. Altogether, the assumption that the government is perfectly efficient in expenditure, made implicitly by Bhagwati but not by Tullock, Krueger, or McCulloch, is at best, a way station. “Bhagwati and Srinivasan (1980) discuss one particular type of inefficient expenditure of tariff revenue, i.e. the situation where the existence of this revenue leads to further rent-seeking. This article, which appeared after Bhagwati (1980) was actually written first (personal correspondence with Bhagwati) but published later, with the result that I actually wrote the first version of this comment without having seen it. There are, of course, many other forms of government inefficiency. ‘There are cases where even a protective taritl will raise national income, albeit at the cost of lowering world income. Bhagwati’s small country assumption rules this out, however.
394
G. Tullock,
Lobbying
and welfare:
A comment
References Bhagwati, Jagdish, 1980, Lobbying and welfare, Journal of Public Economics 14, 355-363. Bhagwati, Jagdish N. and T.N. Srinivasan, 1980, Revenue seeking: A generalization of the theory of tariffs, Journal of Political Economy, no. 6, December. Krueger, A.O., 1974, The political economy of the rent-seeking society, American Economic Review 64, 3, 291-303. McCulloch, Rachel, 1979, Trade and direct investment: Recent policy trends, m: R. Dornbusch and J. Frenkel, eds., International economic policy: Theory and evidence (Johns Hopkins Press, Maryland) 766105. Tullock, Gordon, 1967, The welfare costs of tariffs, monopolies, and theft, Western Economic Journal 5, 224232.