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Public Choice and Government Failure Public choice theory

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Title: 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.
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