Presentation on theme: "The Economics of Collective Decision Making"— Presentation transcript:
1 The Economics of Collective Decision Making Chapter 6The Economics of Collective Decision Making
2 5 Learning GoalsIdentify the size of government spending in the economyIdentify the similarities and differences between market and political process of allocation of goods and servicesDetermine when the political process works wellDetermine when the political process works poorlyAnalyze crony capitalism
4 Watch Video: Stossel Macro 12-Is government too big?
5 The Size of the US Government: 1930-2010 Government Expenditures as a Share (%) of GDP3.06.59.41930Federal8.415.77.3State & local194021.114.76.3195024.116.57.6196030.219.410.9197032.821.011.8198034.221.612.6199031.919.012.9200039.725.414.32010
6 The FactsTotal government spending accounted for only 9.4% of GDP in 1930, and only one third of this spending was at the federal level.Government spending, particularly at the federal level, soared from 1930 to Total government spending rose from 9.4% of GDP in 1930 to 32.8% in 1980 (more than 3 times its 1930 level).After remaining fairly constant between 1980 and 2000, the size of the US government has increased dramatically since (increasing to almost 40% of the U.S. economy in 2010).
12 Public ChoiceUsing the tools of economics (i.e. Chapter 1 guidelines) to understand the political process is called public choice analysisWe are not making value judgments
13 Economics of VotingRational ignorance effect: a rational individual has little or no incentive to acquire information needed to cast an informed voteMarginal benefit of voting: the chance that your vote was the deciding vote multiplied by how much you care that a certain candidate winsMarginal cost of voting: the cost of informing yourself (information is costly), registering to vote, and actually voting.
14 Economics of VotingMedian voter theory: The idea that a vote maximizing politician in a two party system will be close to the middle so that there is little difference between candidates, and the preferences of the median voter will be representedExample: ice cream stand on the beachWatch video: TED- stores next to each otherAs a result, there are not usually wide swings in policy.
15 Q6.1 How would you vote for this proposal: All females in class receive $10 extra credit while all males lost $50 from the final exam.I vote for the proposalI vote against the proposal
16 Note: In my regular classes at FSU, a majority of students are women so this proposal usually gets passed. It makes the point that democratic voting can produce outcomes where the costs outweigh the benefits.
17 See Chapter 6 ActivityI strongly encourage you to do this activity on your own. For step 2, assume Cart 2 is the one that the majority votes for and you are forced to purchase.
18 Watch Video: Stossel MECA-political versus market choices
20 The political process works well when… voters pay in proportion to the benefits they receive, then productive projects will be passed and unproductive projects will notUser charges: requires people who use a service more to pay a larger share of the costExample: gas tax
22 The political process works poorly when… voters receive benefits in disproportion to the costs they incur, then unproductive projects will be passed and productive projects may not
23 Causes of inefficiency (i.e. government failure) Special Interest EffectShortsightedness EffectRent SeekingLack of Profit Motive
24 Watch Video: Popeye Vote for President-convincing voters (just for fun)
25 Special Interest Effect An issue that generates substantial benefits for a small group by generating minimal costs to a large group. (in aggregate, losses may exceed benefits).
26 Special Interest Effect How is this done?Logrolling: The practice of trading votes by a politician to get the necessary support to pass desired legislationPork-barrel legislation: a package of spending projects benefiting local areas financed through the federal government
28 Additional articles about the story US News & World Report- A bridge way too farBalko-Ketchikan bridge articleTed Stevens tirade(These are not required; read them if you’re interested in more about the Ketchikan bridge story)
29 Q6.2 Why is legislation such as that to build the bridge in Ketchikan, Alaska, passed when most everyone knows that it is “pork”?The benefits are concentrated to constituents in a part of Alaska while the costs are spread out over millions of taxpayers.The benefits are diffused to millions of taxpayers and the costs are concentrated among special interest groups.Such legislation will create permanent jobs and expand the local economy.When it comes to federal spending, members of Congress often ignore the interests of their home districts.
30 Shortsightedness Effect Politicians will favor programs that generate current visible benefits, even if long-term costs of the project outweighs the benefits
31 Rent SeekingActions taken by individuals and groups in order to use the political process to take the wealth of othersPeople spend time trying to gain political favors instead of producing
32 Q6.3 If your economics teacher instituted a policy where, at the end of the semester, he redistributed points from students with high grades to those who could lobby the best for those points, what would you expect to happen?An increase in student studying and learningRent-seeking behavior by students who will spend less time studying and more time trying to lobby the teacher for these points.Less efficient use of the teacher’s time as he spends more time listening and responding to student lobbying and less time coming up with better ways to teach the classBoth 2 and 3, but not 1
33 Lack of Profit MotiveUnlike private firms, the public sector lacks the incentive to produce efficiently
34 Watch Video: Stossel Macro 15- competition and efficiency of government
35 Political Favoritism, Crony Capitalism, and Government Failure
36 What is Crony Capitalism? When political decision-makers direct subsidies, grants, tax breaks, and regulatory favors toward businesses willing to provide them with campaign funds and other forms of political support
37 Market entrepreneurs get ahead by providing consumers with products that are more highly valued than the resources required for their productionCrony capitalists get ahead by providing political players with campaign contributions and other political resources in exchange for government contracts, subsidies, tax benefits, and other forms of political favoritism
38 Watch Video: Stossel-Stimulus and crony capitalism