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Natural resources, national income, and resource movement effect under a rent seeking
monopoly
Anar Muradov
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Abstract
In this paper, a new model is developed by referring to the literature of Dutch disease and
rent-seeking for explaining how a natural resource boom in energy sector decreases national
income and induces resource movement effect under a rent seeking monopoly. In the rent seeking
monopoly model, it is shown that resource movement effect certainly occurs during the boom
where labor inputs will move to energy sector from services sector. Moreover, the boom facilitates
rent-seeking and decreases national income.
JEL Classification: D24; D42; D50; D72; O12; O13
Keywords: Monopoly; Rent-seeking; Dutch disease; Natural resources; National income; Energy
Citation: Muradov, A. (2023). Natural resources, national income, and resource movement effect under
a rent seeking monopoly. El Trimestre Economico, 90 (357), 119-154.
https://doi.org/10.20430/ete.v90i357.1486
SSCI, Scopus
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PhD Research Scholar, Fukuoka University, Graduate School of Economics, Fukuoka-Japan.
anar.muradov1987@gmail.com; anar.muradov@kdis.ac.kr, ORCID: 0000-0002-5259-4424
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1. INTRODUCTION
This paper concentrates on the phenomenon of Dutch disease and rent-seeking which are
commonly observed in resource-abundant countries. These two terms are related to the natural
resource curse theory, and it has been one of the widely debated topics in several studies (Gelb,
1988; Auty, 1990, 1993, 1994; Sachs and Warner, 1999, 2001; Gylfason et al., 1999; Bulte and
Damania, 2008). It was firstly introduced by Auty (1993) as a term, and resource curse is known
as a fact that the resource-rich countries perform much worse than resource-poor countries.
Additionally, the origins of the term Dutch disease comes from a historical event in 1959 when
Netherlands discovered gas reserves, and export of the natural resources impacted the non-resource
sector negatively, induced exchange rate appreciation, increased unemployment rate and decreased
capital investment (Corden, 1984).
According to Cordon and Neary’s (1982) Dutch disease model, a natural resource boom is
considered as the extent of technological advancement in energy sector, and the labor inputs move
from services to energy sector, which is known as resource movement effect. The extent of
technological progress shifts the supply curve of commodities in the energy sector to the right, and
rising relative prices of services increases the labor demand in services sector because of spending
effect. The excessive real income which is induced by the boom will lead to additional spending
on services by increasing their price, and it is known as spending effect.
The aforementioned paper discusses these two effects of the boom, taking the political
issues as given. This is problematic because rent-seeking as a political issue affects various sectors
of economy differently, and rent-seeking has also been extensively investigated in previous
literature under the resource curse theory (Auty, 1993; Karl, 1997; Ross, 1999). This research
paper concentrates on Dutch disease and rent-seeking due to the existence of previous empirical
studies which support the fact that rent-seeking activity is rampant in energy sector (Auty, 2001a,
2001b; Van der Ploeg, 2011; Caselli and Michaels, 2013; Bertrand and Quatrebarbes, 2015;
Ogbuabor et al., 2020). The focus will be on Corden and Neary’s (1982) paper (where labor is the
only mobile factor between sectors) and rent-seeking activities of a monopoly (Hindricks and
Myles, 2013, pp. 398-408) because rent-seeking affects resource labor and distorts the utilization
of labor inputs which could be used for producing other outputs. More rent-seeking activities
impact profits of producers negatively and, hence, remaining producers increase their resources
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for wasteful rent-seeking activities. The objective of the paper is to figure out how a rent seeking
monopoly in a booming energy sector affects labor inputs in both sectors and overall national
income. Previous studies do not mention a model of rent seeking monopoly (and also rent has a
different formulation in this model) affecting the above-mentioned sectors under the Dutch disease
model. Rent-seeking activities of monopolies in some resource-abundant countries negatively
affect the welfare of societies by inducing more deadweight loss, and the hybrid model would be
of contributory theoretical explanation in literature for problems related to rent-seeking in mineral
extracting economies. Thus, the paper will contribute to the literature of Dutch disease and political
economy by explaining the impact of rent seeking monopoly on two sectors in terms of labor inputs
and incomes.
The paper will address the literature related to Dutch disease and rent-seeking. The relation
between the resource movement effect and rent-seeking will be explained by only concentrating
on the resource movement effect and omitting the spending effect for simplicity. In the hybrid
model, an assumption of the fixed consumer behavior will be made meaning that consumers do
not assume the level of income. So, demand is fixed in the model, and demand curve does not
depend on technological advancement because if demand depends on that, then the spending effect
will occur. The research will examine how rent-seeking activities of a monopoly have an impact
on the above-mentioned the resource movement effect and national income. The model will show
that the extent of technological advancement in energy sector facilitates rent-seeking, and labor
inputs in services sector depend on rent-seeking activity. The resource movement effect will occur
if there is a rent seeking monopoly in energy sector because it utilizes labor inputs for creating
monopoly profits, and some of these inputs will be used for rent-seeking activities. The model will
also demonstrate that the boom will decrease national income in the case of rent seeking monopoly.
2. LITERATURE REVIEW
Several countries with abundant resources have been associated with resource curse which
explains economy’s dependence on the export of natural resources may bring the country into the
abyss (Barma et al., 2011, pp. 1-10). Resource curse encompasses political and economic ailments
(Van der Ploeg and Poelhekke, 2009; Van der Ploeg, 2011; Ross, 2012) and, most importantly,
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Dutch disease is studied as one of the symptoms of resource curse theory. However, this is a
separate study (Cordon and Neary, 1982) from the resource curse theory because these two terms
are researched separately, and they are both observable in mineral extracting economies.
Sometimes the terms Dutch disease and resource curse are used interchangeably; the Dutch disease
has a narrower meaning for economists compared to resource curse theory (Ross, 2012, pp. 40-
60). Scholars point out that the Dutch disease comes from the extent of technological advancement
in energy sector (Bruno and Sachs, 1982; Corden and Neary, 1982; Corden, 1984). These studies
consolidate the phenomenon of Dutch disease and booming sector economics which are inherent
topics for resource-rich economies under the resource curse theory. The Dutch disease describes
the paradox which occurs when the discovery of large oil reserves, harms a country's broader
economy. Corden and Neary (1982) explain the pioneer model of the Dutch disease in a static
environment, and this model describes the boom through the perspective of a degree of
technological advancement in resource sector. In its dynamic model (Bruno and Sachs, 1982), it
is also mentioned that resource abundance can affect manufacturing sector within an open
economy due to the squeeze of tradable sector. Energy sector usually induce the reduction in
production of other tradable goods and, eventually, this impact depends on government policies
on the distribution of energy windfalls to the private sector.
In economic literature, rent-seeking is one of the factors that deteriorates a society because
of welfare losses it induces (Tullock, 1967, 1987; Krueger, 1974; Posner 1975; Cowling and
Mueller, 1978). According to Hindricks and Myles (2013, p. 389), rent-seeking is the depletion of
resources for making profitable opportunity that is damaging for society. The first idea of rent-
seeking is found in a research paper by Tullock (1967) who explained the welfare loss of society
through creation of a monopoly, tariffs and subsidies. His paper gave initial opinions for recent
literature about rent-seeking to explain resource curse. Although Krueger (1974) introduced the
term rent-seeking in the literature, Tullock’s (1967) work is considered the core research about
rent-seeking for latter studies.
Tullock (1987, p. 147) also mentions that, although rent-seeking activities are usually
focused on government created or protected monopolies, private monopolies are also considered
possibility. In order to support their economic activities, monopolies through lobbying activities
or corruption create barriers against other competitors from entering a market, which in turn
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support monopolies to function continuously in an economy (Krueger, 1974). Moreover, compared
to private monopoly, public regulation incurs larger social costs (Posner, 1975). Hindriks and
Myles (2013, p. 393) also show the complete dissipation theorem implying that the rent will be
equal to the resource cost. They mention that the social cost of rent-seeking monopoly is the
deadweight loss and the monopoly profit. The social costs of monopoly may be greater than
measurement through deadweight loss would suggest.
More recent studies show that rent-seeking is an influential aspect of resource curse
(Torvik, 2002; Larsen, 2006; Mehlum et al., 2006; Congleton et al., 2008). Higher amount of
resources stimulates the surge in number of economic agents with rent-seeking activities and
decrease the activities of efficient firms (Torvik, 2002). The reason is connected to rent-seeking
and increasing returns to scale combination. Productivity can also be affected both negatively and
positively depending on whether that increases profits in rent-seeking or not. On the other hand,
having a better rule of law, transparency and social norms can decrease rent-seeking activities
within domestic market (Larsen, 2006). In a resource-rich economy where property rights are not
determined, natural resource will not benefit a society and wealth gained from resource extraction
will be a rent-seeking prize (Congleton et al., 2008, pp. 1-61). By examining political factors of
rent-seeking, such as small-scale illegal as well as legal rent-seeking and political purchase of
power, the studies conclude that labor displacement, spending and spillover-loss effect lead to slow
growth rate. Furthermore, countries with rampant rent-seeking institutions and resource abundance
tend to have slow growth rate (Mehlum et al., 2006). However, producer-friendly institutions are
supposed to be advantageous factors for using natural resources efficiently and inducing better
growth within an economy. They also show that it is hard to attach Dutch disease only to rule of
law. Hence, mix of bad institutions with resource abundance together play major role for having a
low growth rate.
Most importantly, unlike this paper, Torvik (2002) mentions four different sectors such as
natural resource sector, backward sector (with production of constant return to scale), modern
sector (with production of increasing return to scale) and sector with entrepreneurs engaged in
rent-seeking activities. Another key difference is related to the formulation of rent-seeking in
Torvik (2002) model and this paper. This paper formulates the rent-seeking activity as a difference
of profits in monopoly and social optimum cases. In Torvik (2002) paper, the competition among
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rent seekers plays an important part in a way that increasing number of rent seekers will decrease
each rent seeker’s expected income, and tax rate is also allowed to be increasing with the number
of rent seekers. The total amount of rents that can be gained by rent seekers is the public sector
income (tax, bribes, and natural resources). In his paper, it is shown that natural resource
abundance will certainly decrease national income. My conclusion about national income in case
of rent seeking monopoly is similar to his result but he concentrates on several firms in different
sectors which participate in production with CRS (constant return to scale) and IRS (increasing
return to scale) assumption. This research paper focuses on a single firm in the energy sector and
analyzes the effect of rent-seeking and natural resource abundance (the boom) from a monopoly
perspective. Torvik (2002) also mentions that the increase in labor force will decrease rent-seeking
activities. He made this type of proposition because of the IRS (increasing return to scale) in
production assumption in modern sector which creates demand externality. In contrast to that
paper, my model does not change the size of the labor force, and it demonstrates how the direction
of labor inputs will change when the rent-seeking activity is added to the monopoly. So, instead
of being an alternative to the above-mentioned study, this paper just shows how labor inputs and
national income in the energy sector will be affected under the rent seeking monopoly.
3. THE MODEL
The model assumes that there are two sectors: services and energy sectors. Several specific
assumptions are made in this model in order to reinforce the causal relationships which will be
derived from the model. Firstly, each sector uses only specific factor which is labor input (omitting
capital for simplicity) as the single factor. For clear results, the skill categories (in human capital)
for labor is not taken into account here because the model assumes that labor is perfectly mobile
between sectors, and full employment is maintained which means there are no distortions in
commodity or labor markets. A quantity of labor is supplied in-elastically by workers. This is
divided between production of the two goods in services and energy sectors. Mainly, by ignoring
monetary considerations (implications for real variables, not the nominal ones), the effects of
asymmetric growth between energy and services on resource allocation is examined. The model
also shuts down the possibility of real exchange rate appreciation by assuming a closed economy
(all outputs of firms are sold domestically). Moreover, services are the numeraire of the economy
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and all prices are in terms of units of the service good, whose price is normalized to one. The paper
only considers equilibriums where the economy produces some output of the numeraire sector.
Services are produced with constant return to scale, and one unit of labor can produce one unit of
output. The cost function in the services sector is
(1)
whereis the output level of production in the services sector. Profit maximization in this sector
is
(2)
where is the price of good in the services sector. On the other hand, the cost function in the
energy sector is
(3)
whereis the output level of production in the energy sector and α (α>0) is the parameter about
productivity. The parameter α is seen as a technological advancement or a boom. Profit
maximization in this sector is
(4)
where is the price of good in the energy sector.
Let’s assume that all of the output of the firm is sold on the domestic market. The inverse
demand function in the energy sector is given by
(5)
whereis quantity of demand in the energy sector. β and γ are the positive parameters.
3.1 Social optimum case
Commodity market in the energy sector
Let (,) be allocation of commodity markets of the energy sector at equilibrium.
From the equation (3) marginal cost is equal to price in a social optimum case and it gives
(6)
Solving these equations yields
(7)
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(8)
In the socially optimal quantity case, the profit of the firm in the energy sector will be
(9)
Labor market
Suppose that the total number of workers is unity. Let (,) be a pair of labor at
equilibrium in each sector. An equilibrium condition of labor market is
(10)
Because one unit of labor produces one unit of services, the wage rate at equilibrium is
unity. In general, the cost of production in this model is the product of wage rate and the use of
labor. By using the equations (3) and (8) the labor in the energy sector is determined as follows:
(11)
From equilibrium condition of labor market, the labor in the services sector:
(12)
Commodity market in the services sector
Let (,) be allocation of commodity markets of the services sector at equilibrium.
By Walras law
(13)
(14)
This model formulation does not depend on the services sector. According to the general
equilibrium theory, if all markets except one are in equilibrium, the last market must be in
equilibrium as well (the services sector). Furthermore, by looking at the equation (1) and through
profit maximization of the equation (2), the price in services sector will be equal to unity in the
model.
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3.1.1 Analysis of the social optimum case
The effect of the boom on the labor markets
By referring to Corden and Neary (1982), the boom will be improvement in technological
productivity. For the model, decreasing is taken as a boom because it implies decreasing costs
due to advancement in technology. Differentiating the equations (11) and (12) with respect to
gives
(15)
(16)
If
, then the equation (15) is positive, and the equation (16) is negative. It implies
that when the degree of technological advancement is sufficiently large, the boom in the energy
sector induces the labor inputs to move from the services sector to the energy sector. Following
Corden and Neary (1982), this movement of labor is called as resource movement effect.
If
, then the equation (15) is negative but the equation(16) is positive. It implies that
when the degree of technological advancement is not sufficiently large, the resource movement
effect will not occur.
The effect of the boom on the commodity markets
Additionally, by following Corden and Neary (1982), the effect of the boom on outputs
will be determined. The boom in the energy sector increases the output in this sector:
(17)
10
0
A
B
Supply with a boom
Supply
Demand
Figure 1. Social optimum case
Figure 1 indicates the inverse demand curve and supply curve in the energy sector. The
boom is a technological improvement which induces the inverse supply curve to shift to the right.
Then, the equilibrium quantity will increase, which is consistent with the equation (17).
A marginal effect of the boom on the output in the services sector is ambiguous:
(18)
Let = + be the national income in the social optimum case (Hindricks and
Myles, 2013). A marginal effect of the boom on the national income is
(19)
The sign of the equation (19) is negative (positive) if
(20)
The equations (15), (16) and (20) give the following Lemma:
Lemma 1
i. If
and
, then the boom generates the resource movement effect
and increases national income.
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ii. If
and
, then the boom generates the resource movement effect
and decreases national income.
iii. If
, then the boom does not generate the resource movement effect and
decreases national income (β>0 by referring to (5)).
By referring to the figure 2, it is seen that the first argument of the lemma 1 includes the
place which is mentioned on the right side of the vertical line (
) and below the downward sloping
curve. The second argument is located above the downward sloping curve. Finally, the third
argument is on the left side of the vertical line.
0
Figure 2. Lemma 1
The first and the second arguments of the lemma 1 show the occurrence of the resource
movement effect. The equations (17) and (18) show that the output of the energy sector will
increase but the output of the services sector depends on the parameter values. The equation (18)
means that when
, then the resource movement will occur along with the output reduction
in the services sector. Resource movement effect will happen when there is a sufficient degree of
the boom (
). The first and the second arguments correspond to the resource movement effect
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outcomes. The second argument is more serious from the perspective of the level of national
income. In particular, if beta is sufficiently large (
, the national income decreases due
to the boom.
Intuitively, the occurrence of the resource movement effect in the lemma 1 is connected to
the sufficient degree of the boom (
) because of the cost function (3) in the energy sector. If
α is high, then the costs in the energy sector are also high by making it more inefficient. As it is
assumed previously, labor is the only input in this model, and higher costs mean increasing wages
in the energy sector. Increasing wages will motivate the workers in the services sector to move to
the energy sector by inducing the resource movement effect.
3.2 Monopoly case
In this section, the focus will be on a monopoly for figuring out commodity market and
labor market differences from the social optimum case. Monopolies in some resource-abundant
countries can impact markets negatively by causing insufficient development of competition due
to their powers through creation of barriers. In Chernova and Razmanova (2018) paper, it is
mentioned that vertically integrated big oil companies in Russia operate in all segments of oil
market, which allows them to have a full domination in every aspect of the market by hindering
others to have an access. High level of economic concentration of these companies (Rosneft,
Lukoil, Surgutneftegas, Gazprom-Neft) in the Russian oil market and their vertical integration are
considered main barriers for entry. Monopolies can also set high gasoline prices which negatively
influence consumers in a local market. One empirical study (Luis et al., 2020)) in Spain shows that
two largest monopolies (Repsol and Cepsa) charge high fuel prices to consumers due to having
excessive level of market concentration and control of market.
Moreover, the monopoly case is added here in order to compare with other studies because
they focus on several firms, and as it is mentioned above, a single firm model with a rent
formulation in this paper is not mentioned previously in the context of Corden and Neary (1982)
model.
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Commodity market in the energy sector
Let (,) be allocation of commodity markets of energy sector at equilibrium with
the monopoly. These are determined as follows:
(21)
(22)
where MC is a marginal cost and MR is a marginal revenue.
From the profit maximization condition, marginal revenue is equal to marginal cost
(MR=MC) in the monopoly case and solving these equations yields
(23)
(24)
Profit of the monopoly will be
(25)
Labor market
Let (,) be a pair of labor at equilibrium in each sector. In the monopoly case, labor
input the energy sector will be
(26)
It means labor input in the social optimum case is larger than the labor input in the
monopoly case. Intuitively, in the social optimum quantity case, more quantities of goods are
produced for a society by using more labor compared to the monopoly case.
From the equilibrium condition of labor market, the labor in the services sector:
(27)
Commodity market in the services sector
Let (,) be allocation of commodity markets of the services sector at equilibrium.
By Walras law
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(28)
(29)
3.2.1 Analysis of the monopoly case
The effect of the boom on the labor markets
Differentiating labor inputs in both sectors with respect to gives
(30)
(31)
If , then the equation (30) is positive and the equation (31) is negative. It means that
the resource movement effect will occur. By comparing the equation (15) with the equation (30)
it is clear that in the social optimum case the degree of the resource movement effect is greater
than the one in the monopoly case because of
inequality in the social optimum case and
inequality in the monopoly case. Even if the value of α is relatively lower, the resource
movement effect will occur in the social optimal case.
The effect of the boom on the commodity markets
The boom in the energy sector increases the output in this sector:
(32)
0
A
B
Supply with a boom
Marginal revenue
Rent
Supply
Demand
Producer surplus
Figure 3. Monopoly case
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Figure 3 shows the inverse demand curve and supply curve of the monopoly in the energy
sector. The boom induces the inverse supply curve to shift to the right, and the profit maximization
(MR=MC) point will move from the point A to the point B. The equilibrium quantity will increase,
and it is consistent with the equation (32).
A marginal effect of the boom on the output in the services sector is ambiguous:
(33)
Let = + be the national income of the monopoly case (Hindricks and Myles,
2013). A marginal effect of the boom on the national income is
(34)
The sign of the equation (34) is negative (positive) if
(35)
The equations (30), (31) and (35) give the following Lemma:
Lemma 2
i. If
, then the resource movement effect does not occur and national
income decreases.
ii. If
and
, then the resource movement effect does not occur
and national income increases.
iii. If
and
, then the resource movement effect does not occur
and national income decreases.
iv. If and
, then the boom generates the resource movement effect
and increases national income.
v. If and
, then the boom generates the resource movement effect
and decreases national income.
the parameter of inverse demand function (5), and if the demand for energy is larger
than threshold (
), then national income will decrease regardless of technological
advancement in energy sector ( As it is seen from the figure 4, the first argument of the lemma
2 is located on the right side of the vertical line (
). The second and the third arguments are between
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the vertical lines (
and below (
and above (
the downward sloping line.
The fourth and the fifth arguments are on the left side of the vertical line ( and below (
and above (
the downward sloping line.
0
Figure 4. Lemma 2
Under the equations of (32) and (33), it is clear that the output in the energy sector will
increase. The output in the services sector will shrink under the condition of Resource
movement effect will happen if (sign of Dutch disease phenomenon). The fourth and the
fifth arguments of the lemma 2 correspond to the resource movement effect. In the fifth argument
the result is more serious due to decreasing national income because if beta is sufficiently large
(
then national income decreases due to the boom.
In the social optimum case, the amount of booming is
. In the monopoly case, the
chance of occurrence of the resource movement effect mitigates ( due to the fact that the
firm in the energy sector is a monopolist. The reason is that the monopoly does not produce enough
output and charges higher prices. By decreasing the output, the monopoly decreases the amount of
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the labor for the production of goods in the energy sector, which in turn decreases the chance of
movement of labor from the services sector to the energy sector.
3.3 Monopoly with rent-seeking case
The main goal of the model is to determine how rent seeking monopoly in the energy sector
affects labor inputs in both sectors and overall national income. Previous studies also do not
mention a model of rent seeking monopoly with different rent formulation (difference between
profits in monopoly and social optimum cases) affecting the above mentioned sectors under
Corden and Neary’s (1982) model. Additionally, social costs of rent seeking monopolies can
actually be higher, and Posner (1975) estimates that between 1.7-3.5 percent of GNP (Gross
National Product) of the USA could have been lost due to monopolization. According to Cowling
and Mueller (1978) calculation, the loss for the USA and the UK altogether is between 3-7.2
percent of GNP. Rent-seeking activities of oil companies can harm the society through increasing
level of corruption as well. Vicente (2010) shows that ExxonMobil received oil exploration rights
in Sao-Tome and Principe in 1998 and, afterwards, corruption level significantly increased in that
country compared to previous years. In the case of Brazil, oil industry is predominantly
monopolistic, and one study (Caselli and Michaels, 2013) finds that corruption is widespread in
oil-rich municipalities where rents are acquired through political process.
Labor market
Hindricks and Myles (2013, p. 389) state that unlike profit-seeking, rent-seeking is
considered to be the dissipation of resources for generating profitable opportunity that is harmful
for society. This paper features the level of resources (labor) wasted in the rent-seeking process, a
time. Rent seekers utilize discussion opportunity with politicians for rent-seeking activities. This
could have been used in some more productive activities (profit-seeking) and generates huge
opportunity cost.
Suppose that there are a number of potential monopolists. A monopolist can hike the
market price of energy and receive a profit represented by the equation (25). The value of having
a monopoly position, that is, a rent which is the extra profit generated by a monopoly position and
it will be the difference between the profits in monopoly and social optimum cases (Figure 3).
Potential monopolists enter the energy sector by simultaneously proposing how much money they
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will burn. It is assumed that potential monopolists are all identical and risk-neutral. A potential
monopolist that burns the most money will be a monopolist in the energy sector. The entire value
of the rent will be dissipated, and it will be shown below in the equation (37). These are known as
complete dissipation theorem (Hindrick and Myles, 2013, p. 393).
In this model, the money that a potential monopolist burns corresponds to a labor. Let be
the use of labor for rent-seeking activity. An equilibrium condition of labor market will be
(36)
where superscript indicates monopoly with rent-seeking case.
In this model, the prize for the monopolist will be a rent, which is the difference between
profits in the social optimum case (π()) and the monopoly case (π( because the monopoly
profit is higher than the one in the social optimum case. By applying the previously mentioned
theorem, the labor that is used for rent-seeking can be determined, which means that resources that
are used in rent-seeking up to the point where additional profit is exactly equal to the resource cost.
The value of labor that the monopoly will allocate to rent-seeking is
(37)
Figure 3 demonstrates that in the social optimum case firm’s profit will be the producer
surplus (triangle in blue color), and additional profit (square in orange color) will be added after
the monopoly hikes up the price. Thus, rent will be the difference between the profits in the
monopoly and social optimum cases.
From the equilibrium condition of labor market, the labor in the services sector:
(38)
Commodity market in the services sector
Let (,) be allocation of commodity markets of the services sector at equilibrium. By
Walras law
(39)
(40)
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3.3.1 Analysis of the monopoly with rent-seeking case
The effect of the boom on the labor markets
Differentiating labor inputs in all sectors with respect to gives
(41)
(42)
(43)
The equation (41) is negative when In words, when the degree of technological
advancement is sufficiently large, the boom in the energy sector increases the labor in this sector.
The equation (42) means that if the boom occurs, the labor resource used in rent-seeking strictly
increases because the monopoly will be motivated to gain more rent by engaging in more rent-
seeking activities, which in turn will increase labor inputs for rent-seeking activities according to
the complete dissipation theorem mentioned above. There are two sectors in the model, and the
equation (43) means that the resource movement effect will definitely occur because the equation
is strictly positive and does not depend on the parameter values. Workers who move from the
services sector will engage in either rent-seeking activity (42) or production of energy (41) and
this depends on the parameter values. For the production of energy to occur, there needs to be an
adequate degree of the boom ( because the equation (41) shows that the labor inputs in the
energy sector increases under the condition of .
The effect of the boom on the commodity markets
Let = + be the national income of the rent seeking monopoly case (Hindricks
and Myles, 2013). The boom in the energy sector increases the output in this sector:
(44)
The boom in the energy sector decreases the output in the services sector:
(45)
A marginal effect of the boom decreases the national income:
(46)
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The numerator of the equation (46) is positive because of the equation (47) below:
(47)
The sign of the equation (46) is positive because is positive.
The equations (43) and (46) give the following proposition:
Proposition
When there is a rent seeking monopoly in the energy sector:
i. The boom induces labor inputs to move from the services sector to the energy sector
meaning that the resource movement effect will definitely occur.
ii. The boom facilitates rent-seeking activities.
iii. The boom decreases national income.
After checking the results of the analysis in the case of monopoly with rent-seeking
activities, it is clear that the resource movement effect will definitely occur and the output of the
services sector will decrease (Dutch disease phenomenon). This conclusion is supported by
referring to the equations (43) and (45). Workers will certainly move from the services sector to
the energy sector in order to engage in rent-seeking and production of energy. The rent seeking
monopoly in the energy sector needs labor inputs for generating monopoly profits, and some of
these inputs will be used for rent-seeking activities. It is mentioned previously that the monopoly
without rent-seeking mitigates the resource movement effect problem. However, in the rent
seeking monopoly case this kind of mitigation decreases and changes the outcome.
In order to support the first argument of the proposition, the equation (43) is used which
shows that the resource movement effect does not depend on the parameter values in the rent
seeking monopoly case, and labor inputs will move from the services sector to the energy sector
by participating in either in rent-seeking activities or production of energy. The production of
energy will depend on the degree of the technological advancement ( .
For supporting the second argument of the proposition, the equation (42) is a variable of
degree ( of rent-seeking activities in the model because the boom facilitates workers to engage
in rent-seeking in the energy sector.
21
As for the support of the third argument of the proposition, the equation (46) is used. It
does not depend on the parameter values of α and β. Hence, national income will decrease during
the boom in the case of rent-seeking monopoly.
4. CONCLUSION
This paper concentrates on the rent seeking monopoly (in the context of Dutch disease) in
the energy sector and shows how the incomes and labor inputs are affected. It is demonstrated that
under the natural resource boom, the resource movement effect will definitely occur when there is
a rent seeking monopoly in the energy sector which means that labor inputs will move to the energy
sector from the services sector, and the boom will facilitate rent-seeking activities. The boom also
decreases national income under the rent seeking monopoly.
The key difference between the model in this paper and Torvik (2002) model is the
formulation of the rent which is mentioned above, and he focuses on several firms in different
sectors. This paper concentrates on a single firm in the energy sector, and it is important to keep
in mind that this model does not dispute the results achieved in Torvik (2002) paper but explains
the rent-seeking activity from a monopoly perspective through different rent formulation.
Additionally, the paper only concentrates on the resource movement effect and omits the
spending effect for simplicity. For the future research, the spending effect will be analyzed as a
continuation of the current model in order to further contribute to the Dutch disease literature and
political economy by examining the effect of the rent seeking monopoly on two sectors in terms
of consumption.
22
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