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.