Public Choice and Government Failure

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. It is very unlikely that one person�s vote will decide the outcome of a major election. See Example 4 on page 28-3. Low Voter Turnout

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. 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. Elected Officials and Short Run Focus

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. 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. Special-Interest Group Influence

12. 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. Special-Interest Group Influence

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. 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). Elected Officials and Special-Interest Groups

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. 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. �The Myth of the Rational Voter�

26. 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. �The Myth of the Rational Voter�

27. 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. �The Myth of the Rational Voter�