Government Failure

  1. Economics of Collective Action

    Public Choice Analysis: The study of decision-making as it affects the formation and operation of collective organizations, such as governments.

    1. What is Government?

      The distinguishing characteristic of government is its monopoly on the use of coercive force to modify the actions of its adult citizens.

      The two legitimate functions of government are:

      1. Protection--government maintains security and order by establishing and enforcing rules. The establishment and protection of property rights is a necessary condition for free market system to operate efficiently.
      2. Production--governments may produce goods that the market fails to provide in sufficient quantity to be efficient.
    2. Similarities and differences between market and collective action.
      1. Competitive behavior is present in both the market and the public sector.
      2. Public sector organization can break the individual consumption-payment link.

        Political Good: Any good or service supplied through the political process. (e.g. Federal Farm programs, Health Care?)

      3. No free lunch in either the private sector or public sector.
      4. Compulsion present in the Public Sector.
      5. Income and power are distributed differently in two sectors.
        1. In the public sector persuasive skills, organizational ability, financial contributions, and knowledge are lead to success in the Public sector. Political goods tend to be obtained by those having these attributes and able to deliver political goods to constituents.
        2. In the private sector, those who possess skills or resources which are relatively highly valued by society tend to exchange those skills and resources for more money. More money buys more or better things. Hence, those with valuable skills or resources can in turn exchange those for more private sector goods.
    3. Supply and Demand for Public Sector Action
      1. Voters demand political goods using their political resources --votes, lobbying contributions, and organizational abilities. Vote conscious Politicians supply political goods.
      2. Other things equal, voters will support those candidates whom they expect to provide them with the most benefits, net of cost. Thus, the greater the expected benefit from a candidate's election, the more voters will do to ensure the candidate's success.
      3. Two main reasons that voters turn to the public sector economic organization:
        1. Market Failure. To improve economic efficiency when markets are noncompetitive, suffer from externalities, are unstable, or in the presence of public goods.
        2. A desire to redistribute income. Unfortunately, redistributive policies may tend to reduce the overall size of the economic pie.
          1. Redistribution tends to weaken the link between productive activity and reward.
          2. Redistribution tends to lead to rent seeking.

            Rent Seeking: Actions by individuals and interest groups designed to restructure public policy in a manner that will either directly or indirectly redistribute more income to themselves.

          3. Higher taxes associated with income redistribution tend to cause people to engage in protective activities. These activities tend to be less productive than alternatives (more lawyers and tax accountants and fewer industrial plants).
  2. Conflicts Between Good Economics and Good Politics
    1. Rationally Ignorant Voter--Most citizens recognize that their vote is unlikely to determine the outcome of an elections. Since their vote is highly unlikely to determine the outcome, citizens have little incentive to spend much effort in casting a vote.
    2. The political process tends to work in favor of special interest groups, even when the program is not economically efficient.

      Special Interest Issue: An issue that generates substantial benefits to a small minority while imposing a small individual cost on many other voters. Those with a special interest have a large incentive to vote. The majority have little incentive to vote, therefore it is believed that the political process is biased in favor of the special interest.

    3. Shortsightedness Effect: Misallocation of resources through the public sector that results because public sector action is biased
      1. in favor of proposals yielding clearly defined current benefits in exchange for difficult-to-identify future costs. (Health Care, Social Security)
      2. against proposals with clearly identifiable costs yielding less concrete and less obvious future benefits. (Super-collider, R&D, Basic research).

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This page was last modified Tuesday, April 15, 1997.