Pre‐Existing Distortions, Inter‐Industry Rent Seeking and the Welfare Cost of Policies Subject to Influence

Abstract

It is well known that when there are existing distortions in related markets, partial equilibrium estimates of the welfare costs of new distortions using the standard “Harberger triangle” may be misleading (Goulder & Williams, ). We show that similar general equilibrium considerations also play an important role in the development of accurate estimates of the costs of rent seeking. Producers in other markets will have an incentive to engage in additional rent‐seeking activity to suppress or encourage the establishment of new distortions in hitherto undistorted markets. In these situations, the total amount of resources spent on trying to encourage or discourage a new distortion or increasing an existing distortion can exceed the sum of the partial equilibrium Harberger () “triangle” and Tullock () “rectangle.” The analysis and results contrast sharply with standard general equilibrium measures of the welfare costs of distortions and the general theory of second best, which hold that introducing a new distortion or increasing an existing distortion may, in some instances, be welfare improving.