ECO 481: Public Choice Theory

1
ECO 481Public Choice Theory

• Government Failure -
• Pathological Politics

Dr. Dennis Foster
2
Efficiency Considerations

• Allocative Efficiency - produce the right mix
• Productive Efficiency - produce at the lowest
  cost
• 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
3
1. Perverted Incentives

• No profit - no reward for efficiency.
• Serving others doesnt serve oneself.
• No pricing mechanism to insure thatallocation is
  efficient.
• At Q, marginal value (P) marginal cost
• Criteria for success is majority.
• vs. lower bar of profitability.
• supercedes intensity.
• Can we put a price on health care? Education?

4
2. Collective provision of private wants

• Special Interests are not interested inpublic
  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.

5
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?

6
3. Deficient signaling mechanisms (cont.)

• Log-rolling
• Seems efficient, but . . . end up withprojects
  where TBltTC.
• 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.

7
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 cant vote now.
• how do you benefit from catering to LR concerns?
• Social Security, Health Care.

8
4. Institutional myopia (cont.)

• 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 futures prospects
  their absence actually diminishes the time
  horizons of political beings.

9
5. Dynamic Difficulties

• Volatility since there isnt 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 meanssomeone will
  fight to keep them!

10
6. Electoral Rules and Distorting preferences

• Rules matter and there is no complete set
• Pairing inconsistencies.
• Hawaii election for U.S. House, 1986.
• Plurality means majority loses.
• Hawaii election for U.S. House, 2010.
• Arrows impossibility theorem.
• Are districts good or bad? How drawn?

11
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/govt programs.
• May be overstated - they vote person, not
  policy.
• Shaping opinion - Foster testimony
• Ignoring opinion CFV, ACA

12
6. Policy Symbolism

• The hollow sense of the Senate resolution
• Flagstaff CC is on record SB1070, land mines.
• The policy that cant be achieved
• Gramm-Rudman balanced the budget!
• ObamaCare will reduce health care costs!
• The regulation that cant be enforced.
• Military dont ask, dont tell.
• Fed drug laws Colorado, Washington?
• Financial regulations.

13
Some Final Thoughts

• Imperfect democracies better than dictatorships.
• Are they? Stossel India Hong Kong.
• Friedman and political/economic freedoms.
• Obnoxious political preference harderto 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?

14
ECO 481Public Choice Theory

• Government Failure -
• Pathological Politics

Dr. Dennis Foster