ECO 481: Public Choice Theory 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 Policy symbolism

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. Author argues 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.”

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. – lack incentive to innovate. 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 – Ignoring opinion – CFV, ACA

6. Policy Symbolism The hollow “sense of the Senate” resolution – Flagstaff CC is on record – SB1070, land mines. The policy that can’t be achieved – Gramm-Rudman balanced the budget! – ObamaCare will reduce health care costs! The regulation that can’t be enforced. – Military & “don’t ask, don’t tell.” – Fed drug laws & Colorado, Washington? – Financial regulations.

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 Government Failure - Pathological Politics Dr. Dennis Foster