ECO 481:Public Choice Theory

Government Failure - Government Failure -

Pathological PoliticsPathological Politics

Dr. Dennis Foster

Efficiency ConsiderationsEfficiency Considerations Allocative Efficiency Allocative Efficiency - produce the right mix

Productive Efficiency Productive Efficiency - produce at the lowest cost

Pareto Efficiency Pareto Efficiency - no one can be better off without making someone else worse off.

Sources of inefficiency:Sources of inefficiency:Perverted incentivesCollective provision of private wantsDeficient signaling mechanisms

Institutional myopiaDynamic difficultiesElectoral rules that distort preferencesPolicy symbolism

1. Perverted Incentives1. Perverted Incentives • No profit - no reward for efficiency.No profit - no reward for efficiency.

– Serving others doesn’t serve oneself.

• No pricing mechanism to insure thatNo pricing mechanism to insure thatallocation is efficient.allocation is efficient.

–At Q*, marginal value (P) = marginal cost

• Criteria for “success” is majority.Criteria for “success” is majority.

– vs. lower bar of profitability.

– supercedes intensity.

• Can we put a price on health care? Education?

2. Collective provision of 2. Collective provision of private wantsprivate wants

• Special Interests are not interested inpublic welfare.–Road to Nowhere.

– Tennis courts.

– Pine Mtn. Amphitheater & Flagstaff Aquaplex.

– Earmarks in general.

• Author argues that this reduces spending on truly public goods - agree?

• The illusion of benefit - the penny example.

3. Deficient signaling 3. Deficient signaling mechanismsmechanisms

• In a market, money is an efficient signal–Allocates resources according to our

tastes and preferences.

• In polity, votes are the signal– Equal distribution, not divisible, nor for sale (hmm…)

• Changing the signal - different voting schemes– point voting

– non-geographic voting blocks

– vote = taxes paid?

3. Deficient signaling mechanisms 3. Deficient signaling mechanisms

(con’t.)(con’t.) • Log-rolling– Seems efficient, but . . . end up with

projects where TB<TC.• e.g., Jail & School, Bridge to Nowhere

• Individual vote trading seems unlikely . . .

• Emergence of coalitions of minority interests.

• Communication is suspect– evocative & manipulative.

• “Political communication is rarely conducive to rational or efficient allocation of scarce resources.”

4. Institutional myopia4. Institutional myopia

• Where is there more consideration for the future - in the market or in politics?• Markets:– future production requires current saving.– future values can be discounted to the present.

• Hotelling

• Politics:– future voters can’t vote now.– how do you benefit from catering to LR concerns?– Social Security, Health Care.

4. Institutional myopia4. Institutional myopia (con’t.)(con’t.)

• ““There seem to be no compelling There seem to be no compelling reasons why voters, politicians, reasons why voters, politicians, and bureaucrats should be more and bureaucrats should be more future-oriented than selfish future-oriented than selfish buyers and sellers. Removing buyers and sellers. Removing property rights and the profit property rights and the profit motive does not enhance the motive does not enhance the future’s prospects; their absence future’s prospects; their absence actually diminishes the time actually diminishes the time horizons of political beings.”horizons of political beings.”

5. Dynamic Difficulties5. Dynamic Difficulties

• Volatility since there isn’t just one goal– firms - profit max.

• Bureaucracies slant decisions to min. error– reluctant to make risky choices.

– lack incentive to innovate.

• Once started, hard to stop policies/programs.–Departments of Education & Energy.

• Concentration of benefits meanssomeone will fight to keep them!

6. Electoral Rules and 6. Electoral Rules and Distorting preferencesDistorting preferences

Rules matter and there is no complete setRules matter and there is no complete set

• Pairing inconsistencies.–Hawaii election for U.S. House, 1986.

• Plurality means majority loses.–Hawaii election for U.S. House, 2010.

• Arrow’s impossibility theorem.

• Are districts good or bad? How drawn?

6. Electoral Rules and 6. Electoral Rules and Distorting preferencesDistorting preferences

• Is Electoral College fair?– Is there such a thing as “popular vote?” NO!

• Median voter as decision-maker– Target of interest groups.–Recipient of redistribution/gov’t programs.–May be overstated - they vote person, not policy.

– Shaping opinion - Foster testimony– Ignoring opinion – CFV, ACA

6. Policy 6. Policy SymbolismSymbolism

• The hollow “sense of the Senate” resolution– Flagstaff CC is on record – SB1070, land mines.

• The policy that can’t be achieved–Gramm-Rudman balanced the budget!

–ObamaCare will reduce health care costs!

• The regulation that can’t be enforced.–Military & “don’t ask, don’t tell.”

– Fed drug laws & Colorado, Washington?– Financial regulations.

Some Final ThoughtsSome Final Thoughts

• Imperfect democracies better than dictatorships.–Are they? Stossel & India & Hong Kong.

– Friedman and political/economic freedoms.

• “Obnoxious” political preference harderto take than private preference.–Minimum wages vs. Hummer.

• Extent of externalities in the polity is much broader than in the private sector.– So, if market failure, use system that has more failure?

ECO 481:Public Choice Theory

Government Failure - Government Failure -

Pathological PoliticsPathological Politics

Dr. Dennis Foster