Giving Away Money Costs More Than You Think

People and organizations incur costs when they compete for money that is “given” away. For example, if a college offers a scholarship to the student who writes the best essay on a particular subject, students competing for the scholarship will spend time and resources to create their essays and submit their applications. Although the chosen winner will likely benefit from the prize, the other students who competed for the scholarship and lost also lose the time and money they invested in getting the award. The cumulative sum of the time and effort of all the students together may in fact exceed the monetary value of the award.

Economists call these prizes rents, and the effort expended to get such a prize is called rent seeking. Rent seeking happens when money is awarded based on the result of competition. Professor Michael Munger shows how people will spend time, money, and other resources lobbying for such awards. While people may speak of the government as giving money away, they often fail to recognize the associated costs. One major cost may be that the government gives money to organizations with the best lobbyists, not necessarily those that provide the best services.

9 Comments

  1. Marc Morris

    What if the individuals who competed in the competition spent less than the overall amount for the contest? I know on average it will not happen, but what if?

  2. Brian Phillips

    Imagine how much better our political system would be without all of those lobbyist trying to get favors…

  3. mcgeeal

    @Marc Morris: There is still a positive net gain in what an economist would call “social welfare” because they’re concerning themselves with the overall aggregate. But, as an individual who doesn’t win, they receive a personal net loss of welfare because they used their labor for nothing in return. Basically making one person very well off and everyone else slightly worse off

  4. asexymind

    how much of the trillions the government spends does itcost in lindsay behavior I wonder?

  5. kevinbuttrum

    The Government is only there to protect us from Governments such as themselves. We just need to make Government simple. Protect us from foreign enemies, and corrupt States, and that’s it. No more, no less.

  6. Anonymous

    Not that this system needs to be prohibited. One should however, understand the implications of the system as it actually functions. While the benifits is concentrated and significant. The loss is dispersed and less substantial. It is all about understanding risk/reward on the part if individual participants.  Of course, the game changes when we are discussing the governments distribution of  public funds…

  7. drew.blacker

    I don’t think so. In a way this is b2b advertising costs, and any business development they do. it seems like these costs are incurred in a similar way as this situation here. the only difference seems to be that the institution fielding bids is a more efficient steward of resources and is conducting business based on economic decisions instead of political ones.

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