Economics: The Basics 1st Edition by Mike Mandel

Exercise 4

The local government needs to replace all its traffic signals. Two companies are competing for this business. Company A spends $100,000 on buying a new, more efficient machine to make traffic signals. Company B spends $100,000 on campaign contributions for the city council.
a) If Company B wins the contract, explain how this is an example of rent-seeking behavior.
b) Is Company B likely to charge a higher or a lower price for the traffic signals than Company A?
c) Explain whether this outcome is desirable for the economy and for the taxpayers of the town. Why?