Public Choice and Government Failure Public choice theory

1
Public Choice and Government Failure

• Public choice theory applies economic principles
  to public sector decision making.
• Government failure occurs when government
  action results in a less efficient allocation of
  resources.
• The primary motivation in the public sector is
  assumed to be self-interest.

2
Voters

• Voters cannot vote for the exact political
  policies that they favor.
• People are likely to be more satisfied with the
  choices they can make as consumers than with the
  choices they can make as voters.
• See Example 2 on page 28-2.

3
Low Voter Turnout

• One of the characteristics of elections in the
  U.S. is low voter turnout.
• See Example 3 on page 28-2.
• Low voter turnout occurs because many potential
  voters see the costs of voting as greater than
  the benefits of voting.

4
Low Voter Turnout

• It is very unlikely that one persons vote will
  decide the outcome of a major election.
• See Example 4 on page 28-3.

5
Rational Ignorance

• It is rational to remain ignorant if the cost of
  gaining information is greater than the benefit
  of having the information.
• Most voters will not be well-informed due to
  rational voter ignorance.

6
The Median Voter Model

• The median voter model suggests that the median
  voter must be captured to achieve a majority
  vote. Thus, a candidate will
• 1. Aim for a middle-of-the-road position.
• 2. Label his or her opponents as extremists.
• 3. Adjust his or her positions in response to
  polls.
• 4. Speak in general rather than specific terms.

7
Elected Officials and Short Run Focus

• An elected official will tend to support policies
  that yield benefits in the short run and impose
  costs in the long run.
• This will be true even if the long run costs of
  the policies exceed the short run benefits.

8
Elected Officials and Short Run Focus

• An elected official will tend to oppose policies
  that impose costs in the short run and yield
  benefits in the long run.
• This will be true even if the long run benefits
  of the policies exceed the short run costs.

9
Special-Interest Groups

• A special-interest group is a group of people who
  are especially interested in a particular
  government policy.
• A special-interest group will support policies
  that yield a concentrated benefit for the members
  of the interest group, and impose a cost that is
  usually dispersed over a large number of other
  people.

10
Special-Interest Group Influence

• The influence of special-interest groups is
  increased by
• 1. Low voter turnout.
• Low voter turnout increases the influence of
  those who do vote. Special-interest group
  members are likely to have a high voter turnout.
• See Example 6 on page 28-6.

11
Special-Interest Group Influence

• 2. Rational ignorance.
• Special-interest group members will be
  well-informed about their issue. Other people
  will likely be ill-informed.
• See Example 7 on page 28-6.

12
Special-Interest Group Influence

• 3. Lobbying.
• Special-interest group members are likely to
  contribute money to hire lobbyists to try to
  persuade elected officials to vote a specific way
  on their issue.
• See Example 8 on page 28-6.

13
Elected Officials and Special-Interest Groups

• Because of special-interest group influence,
  elected officials will tend to favor policies
  that yield concentrated benefits and impose
  dispersed costs.
• This will be true even if the dispersed costs
  exceed the concentrated benefits (e.g. farm
  subsidies).

14
Elected Officials and Special-Interest Groups

• Because of special-interest group influence,
  elected officials will tend to oppose policies
  that yield dispersed benefits and impose
  concentrated costs.
• This will be true even if the dispersed benefits
  exceed the concentrated costs (e.g. free trade
  agreements).

15
A Congressional District

• A congressional district can be a
  special-interest group.
• Legislators often trade votes (logrolling) in
  order to pass legislation beneficial to their own
  districts.
• Logrolling often leads to pork barrel
  legislation.
• Pork barrel legislation is an example of
  concentrated benefits and dispersed costs.

16
Government Bureaus

• Government bureaus are likely to be very
  inefficient because
• 1. They have no profit motive.
• 2. They have no owner.
• 3. They usually face no competition.
• 4. They seek to grow.

17
Other Sources of Government Failure

• 1. Difficulty in measuring the marginal social
  benefit and the marginal social cost of
  government spending.
• With government spending, benefits and costs
  usually have to be estimated by government
  officials.
• See Example 10 on page 28-9.

18
Other Sources of Government Failure

• 2. Taxes collected do not reflect the full cost
  of a government program.
• Two types of costs are incurred when the
  government collects taxes and uses resources to
  provide goods and services
• a. The opportunity cost of the resources
  used.
• b. The excess burden of the tax.

19
Other Sources of Government Failure

• 3. The inefficiencies caused by income
  redistribution. Income redistribution
• a. Reduces the reward for productive
  behavior and reduces the punishment for
  unproductive behavior.
• b. Encourages socially wasteful rent
  seeking.
• c. Leads to higher tax rates, which increase
  the excess burden of taxation.

20
Other Sources of Government Failure

• 4. Unintended consequences of government
  policies.
• Policies intended to accomplish a desirable goal
  may have unintended consequences that are
  undesirable.
• See Example 12 on page 28-10.

21
Other Sources of Government Failure

• 5. Majority voting may be economically
  inefficient.
• The loss imposed on the minority may exceed the
  benefit to the majority.
• See Example 13 on page 28-10.

22
Other Sources of Government Failure

• 6. Government may stand in the way of creative
  destruction.
• Creative destruction describes the short run
  upheaval caused by the development of new
  technology.
• Standing in the way of creative destruction will
  yield concentrated benefits (to the producers
  using outdated technology) and will impose
  dispersed costs (on all of society).

23
Other Sources of Government Failure

• 7. Government suffers from the principal-agent
  problem.
• Elected officials and other government employees
  are agents of the people.
• Government employees may pursue their own
  interests at the expense of the best interest of
  the people.

24
The Myth of the Rational Voter

• In 2007, economist Bryan Caplan published The
  Myth of the Rational Voter Why Democracies
  Choose Bad Policies.
• Caplan asserts that voters are not just
  rationally ignorant, but are systematically
  biased in favor of mistaken views.

25
The Myth of the Rational Voter

• According to Caplan, noneconomists are biased
  toward four common misconceptions
• 1. Antimarket bias. This is a tendency to
  underestimate the economic benefits of the market
  mechanism.
• 2. Antiforeign bias. This is the tendency to
  underestimate the economic benefits of
  interaction with foreigners.

26
The Myth of the Rational Voter

• 3. Make-work bias. This is the tendency to
  underestimate the economic benefits of conserving
  labor.
• 4. Pessimistic bias. This is the tendency to
  overestimate the severity of economic problems
  and underestimate the (recent) past, present, and
  future performance of the economy.
• See Examples 15A and 15B in the textbook.

27
The Myth of the Rational Voter

• Caplan asserts that noneconomists are more
  rational when they make choices as consumers than
  when they make choices as voters.
• Caplan suggests that more economic decisions
  should be left to the market instead of the
  political process.