THE ROLE OF GOVERNMENT

PUBLIC CHOICE THEORY  So far we have discussed how the government intervenes when there is a market failure: Externalities, positive and negative.  To correct for market failures, the gov. encourages those things which have positive externalities, and discourages things with negative externalities.  Examples: taxing or subsidizing

WHEN GOVERNMENT FAILS  The Public Choice theory addresses the failure of government and how to balance the evaluation of the role of government.

PUBLIC CHOICE THEORY  Ideally, in a democratic society, we see the role of government as trying to improve society.  Political Leaders: wise, just, dedicated, self- sacrificing OR  Stupid, incompetent, corrupt and self-serving  the conventional view is that a responsible electorate can (and should) vote these less desirables OUT of office.  Therefore, poor leadership is generally to be blamed on political apathy!

PUBLIC CHOICE THEORY  BUNK! Say the Public Choice Theorists  When government is studied using the tools of economics, PCT say it fails more often than markets fail.

PUBLIC CHOICE THEORY  Why? Not much difference in the parties. Special interest prevails over the public good It is rational not to vote Bureaucrats are inefficient

 It is not a matter of getting the right people in government]  Government fails because bureaucrats want to maximize their ability to gain votes and power  Self-interest PUBLIC CHOICE THEORY

 People respond to incentive!  Why does self interest lead to the public good in a private market but not to the public good in the government sector? PUBLIC CHOICE THEORY

 Key Ideas:  Is it rational for government leaders to favor special interests over the general public interest? Concentrated versus special interests Information costs PUBLIC CHOICE THEORY

 Special interests have a big stake in Gov. so big interest.  They give politicians contributions and support ( politicians KNOW that).  Each member of the public may lose a little when special interest gets its way, so public doesn’t pay attention.  Public is ignorant.  Politician goes with special interest.  The more concentrated the benefit to the special interest and the more diffused the cost is to the public, the more likely the special interest will get its way. PUBLIC CHOICE THEORY

 Why are politicians mainly in the middle of the road?  The median-voter hypothesis predicts that politicians, regardless of party, will appeal to the median voter in the constituency they represent.  Politicians will take a more extreme position in the primary election (when they are appealing to the median voter in their party) than in the general election. PUBLIC CHOICE THEORY

 Why are people rational or irrational when they spend little time evaluating candidates before they vote and when they don’t vote?  Concept of rational ignorance.  Why be informed about something when your vote counts so little? Why even vote?

PUBLIC CHOICE THEORY  If this is true, why do people vote? The Public choice theory says voting is a consumption activity. Voting gives people a feeling that they did their civic duty. They can complain without guilt.

 What is the effect of bureaucratic entrepreneurs on government? Business wants to maximize profits. A bureaucrat is successful if they maximize their power. They are rewarded when they expand the department. If they are more efficient, they have a smaller department Incentive to expand, not reduce their departments. Larger means more power, higher salary, bigger office larger pension, etc. Activity #58