Giving Away Money Costs More Than You Think

Summary

The script discusses the concept of 'rent seeking,' illustrating how attempts to give away money, like government grants, often lead to unintended costs. It uses a college scholarship example to show how competition for the prize can result in a net loss, with applicants expending more effort than the value of the award. The message is that giving away money without competition is ineffective and can lead to inefficiencies and misallocation of resources in society.

Takeaways

• 💡 Rent seeking is the process where individuals or firms compete for unearned income, such as government grants or subsidies.
• 🤔 Giving away money through competition can lead to a net loss, as the effort expended to win the prize can exceed its value.
• 📚 The example of a college scholarship illustrates how rent seeking can result in wasted effort and resources.
• 💼 The concept of 'rent' in economics refers to an income exceeding what could be earned in a competitive market.
• 🏆 Competition for a rent can lead to inefficiencies, as the focus shifts from merit to the ability to secure the prize.
• 💼 In the case of the scholarship, the total effort spent by applicants exceeds the monetary value of the award.
• 🏦 Government programs that distribute money can inadvertently encourage rent-seeking behavior.
• 🏭 Contracts awarded through rent seeking may go to firms that excel at lobbying rather than those best suited to deliver the service.
• 💡 The discourse on government handouts often overlooks the inefficiencies and resource waste associated with rent seeking.
• 🗳️ It is crucial for voters and politicians to understand the unintended consequences of trying to give money away without considering rent seeking.
• 🔄 The script emphasizes the need for a shift in focus from the quantity of money given to the mechanisms and outcomes of its distribution.

Q & A

What is the concept of 'rent seeking' as described in the script?

Rent seeking is the act of using resources to compete for money or benefits that are being given away, often through government programs, grants, or subsidies.

Why does the script suggest that you can't give money away without incurring costs?

The script suggests that when money is given away, especially in a competitive environment, people or firms will expend resources to compete for it, which can lead to a net loss overall.

What is the economic term for the prize in the college scholarship example provided?

The economic term for the prize in the example is 'rent,' which refers to a reward or benefit that is more than what could normally be obtained.

How does the script illustrate the inefficiency of rent seeking with the college scholarship example?

The script illustrates this by calculating that while the college tried to give away $10,000, the students collectively spent over $12,000 in effort, making the scholarship a net loss.

What is the potential downside of awarding contracts based on rent-seeking activities?

The potential downside is that contracts may be awarded to companies that are best at lobbying for the rent, rather than those that are best at providing the service required.

Why does the script argue that much of the money given away by the government is wasted?

The script argues that much of the money is wasted because it is dissipated in the competition to win the rent, and not all of it contributes to the intended purpose.

What is the main problem with rent seeking according to the script?

The main problem with rent seeking is that it wastes resources, as people or firms spend time and effort competing for the money rather than using those resources productively.

How does the script suggest the net benefit of the scholarship winner is less than the prize amount?

The script suggests that the net benefit is less because the winner had to spend many hours working to win the scholarship, reducing the actual value of the prize to them.

What is the script's implication about the focus of political discourse on giving money away?

The script implies that political discourse often focuses on the amount and recipients of money given away, without acknowledging the problem of rent seeking and its associated costs.

What lesson does the script want voters and politicians to learn about giving money away?

The script wants voters and politicians to learn that you can't just give money away without considering the costs and inefficiencies associated with rent seeking.

Outlines

00:00

💰 The Paradox of Money Distribution

This paragraph discusses the counterintuitive nature of distributing money, especially through government programs like grants and subsidies. It introduces the concept of 'rent seeking,' where individuals or firms compete for money that is being given away, often expending more resources than the value of the money itself. The example of a college scholarship is used to illustrate how the competition for a $10,000 prize can lead to a net loss, as the collective effort of applicants exceeds the value of the scholarship. The paragraph emphasizes the inefficiency and waste of resources that occur when money is distributed without proper competition, and how this can lead to contracts being awarded based on lobbying rather than merit.

Keywords

💡Rent seeking

Rent seeking is the act of expending resources to gain a financial advantage without producing any benefit or wealth. In the context of the video, it refers to the efforts people or firms put into competing for money being given away, such as through grants or scholarships, leading to wasted resources. The script highlights how students spend time and effort competing for a scholarship, which ultimately results in a net loss of resources.

💡Government programs

Government programs are initiatives funded and operated by the government to provide benefits or services to the public. The video explains that when the government tries to give away money through these programs, it often leads to rent seeking behavior, where resources are wasted in the competition to secure these benefits, rather than the intended purpose of the programs.

💡Grants

Grants are sums of money given by an organization, especially a government, for a particular purpose. The video uses grants as an example of government giveaways that can lead to rent seeking, where people or firms spend time and resources to secure the grant rather than focusing on productive activities.

💡Subsidies

Subsidies are financial assistance given by the government to support or promote economic sectors. In the video, subsidies are mentioned as another form of government handout that leads to rent seeking, where businesses expend resources to obtain these funds instead of using them for productive purposes.

💡Handouts

Handouts are benefits or money given freely without any exchange or return. The video discusses how government handouts, including grants and subsidies, often result in rent seeking, where the competition to obtain these handouts leads to wasted resources and inefficiencies.

💡Scholarship

A scholarship is a grant or payment made to support a student's education, awarded on the basis of academic or other achievements. The video provides an example of a scholarship competition where students expend significant effort to win a prize, illustrating the concept of rent seeking and how it leads to a net loss of resources.

💡Competition

Competition in the context of the video refers to the rivalry among individuals or firms to obtain financial benefits like grants, subsidies, or scholarships. The video explains how such competition leads to rent seeking, where more resources are expended in the pursuit of the prize than the value of the prize itself, causing inefficiencies.

💡Net loss

A net loss occurs when the total expenses exceed the total revenues or benefits. The video illustrates a net loss through the example of students competing for a scholarship, where the combined effort and resources spent by all participants surpass the value of the scholarship itself, leading to an overall loss.

💡Lobbying

Lobbying is the act of attempting to influence the decisions of government officials, usually by special interest groups. In the video, lobbying is cited as a form of rent seeking, where companies spend resources to secure government contracts or benefits, which can lead to inefficient allocation of resources.

💡Rent

In economics, rent refers to earnings in excess of what is necessary to keep a factor of production in its current use. The video uses the term to describe the financial prize offered by a scholarship, explaining that the competition for such rents leads to rent seeking behavior, where resources are wasted in the effort to win the prize.

Highlights

The concept of rent seeking is introduced, explaining why it's difficult to simply give money away without incurring costs.

Rent seeking occurs when people or firms expend resources to compete for money that is being given away.

Economists define 'rent' as a prize that offers more than one could normally earn from other activities.

The problem with rent arises when competition for it, known as rent seeking, is introduced.

An example of a scholarship requiring an essay is given to illustrate the concept of rent and rent seeking.

The essay competition results in students spending more effort than the scholarship is worth, creating a net loss.

The winner of the scholarship also experiences a net benefit that is less than the prize amount due to the time and effort spent.

The transcript emphasizes that giving away money, especially by the government, often leads to resource-wasting rent seeking behavior.

Rent seeking can result in contracts being awarded to companies that are best at lobbying, rather than those best at providing the service.

The transcript points out that much of the money given away by the government is wasted in the competition for it.

Political discourse often overlooks the issue of rent seeking when discussing government handouts.

Voters and politicians need to understand the implications of rent seeking when considering government financial giveaways.

The transcript suggests that the idea of simply giving money away is flawed and should be reconsidered.

The importance of recognizing the hidden costs associated with rent seeking is highlighted.

The transcript concludes by emphasizing the need for a shift in perspective regarding government financial aid.

Transcripts

You can't give money away. Now that sounds crazy, but it's true. This is even more

true for government programs that try to give away money through grants, subsidies, and

other handouts. Do you want to know why? To explain I'll need to tell you about something

called rent seeking.

Now if you try to give away money, unless you're giving it to one person or group

in particular without opening it up to any competition, people or firms will expend resources

in order to get the money you're giving away. In effect, they're paying for the

opportunity to get the money.

Here's an example you'll all recognize. Suppose a college gives a scholarship for

the best 20-page essay. The scholarship is $10,000. In this case, you have to write about

"what kind of flower would you like to be?" The money the college is trying to give away

is what economists call a rent.

A rent is a prize, something more than you could normally get and more than you could

get from any other activity. Now the rent is not the problem, or it wouldn't be if

the school just gave it away in a lottery. The problem comes when we ask people to compete

for the money. That competition is called rent seeking.

All the applicants will expend a lot of time and effort trying to make their essay the

best. So suppose 100 students apply for the $10,000 scholarship, and on average they spend

15 hours working on the 20-page paper. And suppose their time reading, doing chores,

or working in a job is worth about $8 an hour. Let's add the cost of this competition up.

The school tried to give away $10,000, but the students spent over $12,000 of effort

without really edifying themselves in the process. The scholarship was a net loss overall.

Sure the winner's better off, but even her net benefit is slightly less than $10,000.

Then she had to work so many hours to win it. In other words you can't give away money—at

least not without incurring a lot of cost in the process.

This is an extremely important lesion to remember when we talk about the government giving money

away. When the government has money to give away, people or firms will spend time and

resources competing for that rent through applications, proposals, lobbying, and other

means.

This rent seeking wastes resources, and it leads to contracts being awarded to the companies

that are the best at lobbying for the rent, not the companies that are best at producing

the service we want to contract for. Worse, much or even most of the money being given

away is wasted, dissipated in the competition to win the rent in the first place.

And yet so much of our political discourse focuses on how much money should be given

away and to whom, without acknowledging the problem of rent seeking. It's time for voters

and politicians alike to learn that you can't just give money away.