ECO 481: Public Choice Theory Week 4: Government Failure - Pathological Politics Dr. Dennis Foster

Efficiency 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: perverted incentives collective provision of private wants deficient signaling mechanisms institutional myopia dynamic difficulties electoral rules that distort preferences

1. 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 that allocation is efficient. No pricing mechanism to insure that 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 private wants Special Interests are not interested in public welfare. – Road to Nowhere. – Tennis courts. – Pine Mtn. Amphitheater & Flagstaff Aquaplex. – Earmarks in general. Authors argue that this reduces spending on truly public goods - agree? The illusion of benefit - the penny example.

3. Deficient signaling mechanisms 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 (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.”

3. Deficient signaling mechanisms - logrolling (con’t.) Explicit vs. Implicit – If benefits > costs … – Conclusion: more local control! Morality issue – Even laws are ineffective. – Don’t we want politicians that “reach across the aisle?” Who knows what’s in bills! Lobbying – Concentrate benefits/diffuse costs; in the “public interest.”

4. 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 myopia(con’t.) 4. Institutional myopia (con’t.) “There seem to be no compelling reasons why voters, politicians, and bureaucrats should be more future- oriented than selfish buyers and sellers. Removing property rights and the profit motive does not enhance the future’s prospects; their absence actually diminishes the time horizons of political beings.” “There seem to be no compelling reasons why voters, politicians, and bureaucrats should be more future- oriented than selfish buyers and sellers. Removing property rights and the profit motive does not enhance the future’s prospects; their absence actually diminishes the time horizons of political beings.”

5. Dynamic Difficulties Volatility since there isn’t just one goal – firms - profit max. Bureaucracies slant decisions to min. error – reluctant to make risky choices. Once started, hard to stop policies/programs. – Departments of Education & Energy. Concentration of benefits means someone will fight to keep them!

6. Electoral Rules and Distorting preferences Rules matter and there is no complete set Pairing inconsistencies. – Hawaii election for U.S. House, Plurality means majority loses. – Hawaii election for U.S. House, Arrow’s impossibility theorem. Are districts good or bad? How drawn?

6. Electoral Rules and Distorting 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, CFV – Ignoring opinion - Health care reform

Some Final Thoughts Imperfect democracies better than dictatorships. – Are they? Stossel & India & Hong Kong. – Friedman and political/economic freedoms. “Obnoxious” political preference harder to 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 Week 4: Government Failure - Pathological Politics Dr. Dennis Foster