| UNIT TWO |
CHAPTER 6
The Economics of Collective Decision-Making
I.
Overview of Collective Decision Making
A.
Public choice analysis applies the tools of economics to the political
process. The goal is to provide insight concerning how the process works.
1.
Self-interested behavior is present in both market and political sectors.
2.
Political process can be viewed as a complex exchange process involving
(1) voter-taxpayers, (2) politicians, and (3) bureaucrats.
3.
The Voter-Consumer
a.
Voters will tend to support those candidates whom they believe will
provide them the most government services and transfer benefits, net of personal
costs.
b.
Rational Ignorance Effect: Recognizing their vote is unlikely to be
decisive, most voters have little incentive to obtain information on issues and
alternative candidates.
c.
Because of the rational ignorance effect, voters will be uninformed on
many issues; such issues will not enter into their decision making process.
4. The Politician-Supplier
a.
Political
officials: interested in winning elections. Just as profits are the lifeblood of
the market entrepreneur, votes are the lifeblood of the politician.
b.
Rationally uninformed voters often must be convinced to “want” a
candidate.
c.
Legislative bodies are something like a Board of Directors
5.
Civil Servants Government Bureaucrats as Political Participants
a.
Bureaucrats (person that handle day-to-day operations of government) seek
promotions, job security, power, etc.
b.
The interests of bureaucrats are often complementary with those of
interest groups they serve.
c.
Bureaucrats can usually expand their own interests, as well as that of
their constituents, by working for larger budgets and program expansion.
II. When
Voting Works Well
A.
Other things constant, legislators will have a strong incentive to
support political actions that provide voters with large total benefits relative
to costs.
B. If a government
project is really productive, it will always be possible to allocate the
project’s cost so that all voters will gain.
C.
When voters pay in proportion to benefits received, all voters will gain
if the government action is productive (and all will lose if it is
unproductive.) Under these circumstances, there is a harmony between good
politics and economic efficiency.
III. When Voting
Conflicts With Economic Efficiency
A.
Special Interest Effect
1.
Special Interest Issue: One that generates substantial personal benefits
for a small number of constituents while imposing a small individual cost on a
large number of other voters.
2.
Members of interest group will feel strong about an issue that provides
them with substantial personal benefits. Such issues will dominate their
political choices.
3.
In contrast, the voters bearing the cost of special‑interest
legislation will often be uninformed on such an issue because it exerts only a
small impact on their personal welfare and because they
are unable to avoid the cost by becoming better
informed.
4.
Politicians have a strong incentive to favor special interest even if
action is inefficient.
5.
Logrolling and pork-barrel legislation strengthen the special interest
effect.
B. Shortsightedness
Effect
1.
Issues that yield clearly defined current benefits at the expense of
future costs that are difficult-to-identify.
2.
Political process is bias toward the adoption of such proposals even when
they are efficient.
C. Rent Seeking
1.
Actions by individuals and interest groups designed to restructure public
policy in a manner that will either directly or indirectly redistribute more
income to themselves.
2.
Widespread use of the taxing, spending, regulating powers of government
that favors some at the expense of others will encourage rent seeking.
3.
Rent seeking moves resources away from productive activities. The output
of economies with substantial amounts of rent seeking will fall below their
potential.
D. Lack of
Incentive for Operational Efficiency
1.
In the public sector, the absence of the profit motive reduces the
incentive of producers to keep costs low.
2.
Neither is there a bankruptcy process capable of weeding out inefficient
producers.
3.
Public‑sector managers are seldom in a position to gain personally
from measures that reduce costs.
4.
Because public officials and bureau managers spend other people’s
money, they are likely to be less conscious of cost than they would be with
their own resources.
IV. Economics of the
Transfer Society
A.
There is nothing in positive economics that indicates one distribution of
income is better than another.
B. A large and
growing part of government is devoted to transferring income, most of which does
not go to poor people.
C.
There are three major reasons why large‑scale redistribution will
reduce the size of the economic pie:
1.
When taxes take a larger share of one’s income, the individual reward
derived from hard work and productive service is reduced.
2.
As public policy redistributes a larger share of income, more resources
will flow into wasteful rent seeking activities.
3.
Higher taxes to finance income redistribution and an expansion in
rent-seeking will induce taxpayers to focus less on income-producing
activities, and more on actions to protect their income.
V.
Public Sector Vs. Market Sector: A Summary
A.
These factors weaken the case for market‑sector allocation:
1.
Lack of competition
2. External costs and
benefits
3.
Public goods
4.
Poor information
B.
These factors weaken the case for public‑sector intervention:
1.
The power of special interests
2.
The shortsightedness effect
3.
Rent seeking costs
4.
Lack of signals and incentive to promote operational efficiency
VI. Implications of Public
Choice: Getting More From Government
A. Both bad news and good news flow from
public choice analysis.
1.
The bad news: For certain classes of economic activity, unconstrained
democratic government will predictably be a source of economic waste and
inefficiency.
