The Economics of Politics “Pork Barrel Spending”  A public expenditure that is larger than the total benefit it creates, but that is favored by a legislator because his or her constituents benefit from the expenditure by more than their share of the resulting extra taxes

Sources of Inefficiency in the Political Process Logrolling  The practice whereby legislators support one another’s legislative proposals Rent-Seeking  The socially unproductive efforts of people or firms to win a prize.

Rent-Seeking Inefficiency occurs when: The gains from a government program are concentrated in the hands of a few beneficiaries. The costs are spread among many.

Rent-Seeking Example Assume  Price support bill will raise sugar prices by $0.10/lb.  Average American consumes 100 pounds of sugar per year.  Demand for sugar is inelastic

Sources of Inefficiency in the Political Process Why don’t citizens vote out legislators who support such bills? Rational ignorance Free riders Even though this is a hugely inefficient way to redistribute income (in this case, from sugar consumers to domestic sugar producers), it is exactly what the government does.

Problems peculiar to Government Bureaucracy and politicking  Slow decisions, not always rational outcomes  Rent seeking Lack of Information  Don’t know costs or benefits as well as firms or consumers do Restriction on choice  Any laws to alter market outcomes require some sort of restriction

The Moral to this Story: Government is an alternative, not the solution.  Don’t rule out government intervention dogmatically  But don’t automatically assume it can fix things Economic theory helps us predict when government intervention will work.