©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 26 “public choice”

1 ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e

Chapter 26Chapter 26“Public Choice”“Public Choice”

Chapter 26Chapter 26“Public Choice”“Public Choice”

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Explain why democracy is imperfect, but still Explain why democracy is imperfect, but still likely the best political system.likely the best political system.

2.2. Point why it is reasonable to accept some Point why it is reasonable to accept some inefficiencies within government.inefficiencies within government.

3.3. Identify the median voter model and explain Identify the median voter model and explain why that voter holds the key to political why that voter holds the key to political outcomes.outcomes.

4.4. Discuss why legislators engage in vote trading Discuss why legislators engage in vote trading that leads to excessive government spending.that leads to excessive government spending.

1.1. Explain why democracy is imperfect, but still Explain why democracy is imperfect, but still likely the best political system.likely the best political system.

2.2. Point why it is reasonable to accept some Point why it is reasonable to accept some inefficiencies within government.inefficiencies within government.

3.3. Identify the median voter model and explain Identify the median voter model and explain why that voter holds the key to political why that voter holds the key to political outcomes.outcomes.

4.4. Discuss why legislators engage in vote trading Discuss why legislators engage in vote trading that leads to excessive government spending.that leads to excessive government spending.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

5.5. Describe rent seeking and how it can lead to Describe rent seeking and how it can lead to inefficiency in the political process.inefficiency in the political process.

6.6. Explain how both self interest and the public Explain how both self interest and the public interest motivate excessive spending within interest motivate excessive spending within administrative agencies.administrative agencies.

7.7. Resolve the apparent contradiction between Resolve the apparent contradiction between the public’s desire for a smaller government the public’s desire for a smaller government and the data showing increasing government and the data showing increasing government spending over time.spending over time.

5.5. Describe rent seeking and how it can lead to Describe rent seeking and how it can lead to inefficiency in the political process.inefficiency in the political process.

6.6. Explain how both self interest and the public Explain how both self interest and the public interest motivate excessive spending within interest motivate excessive spending within administrative agencies.administrative agencies.

7.7. Resolve the apparent contradiction between Resolve the apparent contradiction between the public’s desire for a smaller government the public’s desire for a smaller government and the data showing increasing government and the data showing increasing government spending over time.spending over time.


26.126.1CHOOSING A POLITICAL SYSTEMCHOOSING A POLITICAL SYSTEM26.126.1CHOOSING A POLITICAL SYSTEMCHOOSING A POLITICAL SYSTEM• Government failureGovernment failure involves inefficiencies involves inefficiencies

within the government itself.within the government itself.

• The field of The field of public choicepublic choice looks at looks at economic incentives within government, economic incentives within government, including those that face voters, including those that face voters, politicians, and the administrators of politicians, and the administrators of government programs.government programs.

• There is no way to entirely get rid of There is no way to entirely get rid of government failure.government failure.

• Government failureGovernment failure involves inefficiencies involves inefficiencies within the government itself.within the government itself.

• The field of The field of public choicepublic choice looks at looks at economic incentives within government, economic incentives within government, including those that face voters, including those that face voters, politicians, and the administrators of politicians, and the administrators of government programs.government programs.

• There is no way to entirely get rid of There is no way to entirely get rid of government failure.government failure.


The Idea of a Benevolent DictatorThe Idea of a Benevolent DictatorThe Idea of a Benevolent DictatorThe Idea of a Benevolent Dictator

o Economist define a benevolent dictatorship as a Economist define a benevolent dictatorship as a form of government in which well-meaning and form of government in which well-meaning and well informed officials make all of the best well informed officials make all of the best choices.choices.o Obviously since people make up government there is Obviously since people make up government there is

no such thing.no such thing.o Real world dictatorships do not look so Real world dictatorships do not look so

benevolent, as they have little incentive to benevolent, as they have little incentive to follow the wishes of the public or to avoid waste follow the wishes of the public or to avoid waste in government actions.in government actions.

o The prosperous countries of the world are not The prosperous countries of the world are not characterized by dictatorships.characterized by dictatorships.

o Economist define a benevolent dictatorship as a Economist define a benevolent dictatorship as a form of government in which well-meaning and form of government in which well-meaning and well informed officials make all of the best well informed officials make all of the best choices.choices.o Obviously since people make up government there is Obviously since people make up government there is

no such thing.no such thing.o Real world dictatorships do not look so Real world dictatorships do not look so

benevolent, as they have little incentive to benevolent, as they have little incentive to follow the wishes of the public or to avoid waste follow the wishes of the public or to avoid waste in government actions.in government actions.

o The prosperous countries of the world are not The prosperous countries of the world are not characterized by dictatorships.characterized by dictatorships.


Democracy is an answer to the inefficiencies of Democracy is an answer to the inefficiencies of dictatorship.dictatorship.

It provides for a representative government It provides for a representative government that responds to the wishes of the public.that responds to the wishes of the public.

The processes of democracies are costly and The processes of democracies are costly and messy.messy.

Despite the cost, democracies lead the world in Despite the cost, democracies lead the world in standards of living.standards of living.

The challenge in economics is to understand The challenge in economics is to understand and offer guidance on how to improve and offer guidance on how to improve incentives within the democratic process.incentives within the democratic process.

Democracy is an answer to the inefficiencies of Democracy is an answer to the inefficiencies of dictatorship.dictatorship.

It provides for a representative government It provides for a representative government that responds to the wishes of the public.that responds to the wishes of the public.

The processes of democracies are costly and The processes of democracies are costly and messy.messy.

Despite the cost, democracies lead the world in Despite the cost, democracies lead the world in standards of living.standards of living.

The challenge in economics is to understand The challenge in economics is to understand and offer guidance on how to improve and offer guidance on how to improve incentives within the democratic process.incentives within the democratic process.

Democracy- A Messy Process Democracy- A Messy Process Towards EfficiencyTowards Efficiency



The political process does not provide The political process does not provide definitively efficient answers.definitively efficient answers.

The problem of The problem of cyclingcycling occurs when the order occurs when the order of political choices determines the outcomes.of political choices determines the outcomes.

The possibility of cycling illustrates how The possibility of cycling illustrates how important it can be to set the agenda.important it can be to set the agenda.

Cycling also illustrates a certain irrationality Cycling also illustrates a certain irrationality within the collective choice process.within the collective choice process.

The political process does not provide The political process does not provide definitively efficient answers.definitively efficient answers.

The problem of The problem of cyclingcycling occurs when the order occurs when the order of political choices determines the outcomes.of political choices determines the outcomes.

The possibility of cycling illustrates how The possibility of cycling illustrates how important it can be to set the agenda.important it can be to set the agenda.

Cycling also illustrates a certain irrationality Cycling also illustrates a certain irrationality within the collective choice process.within the collective choice process.






OptionRanking by Representative #1

Ranking by Representative #2

Ranking by Representative #3

Increased defense spending 1 3 2Tax rebates to the poor 2 1 3Across-the-board tax cut 3 2 1

PREFERENCES OF SUBCOMMITTEE MEMBERS




ChoicesRepresentative #1's Vote

Representative #2's Vote

Representative #3's Vote

Subcomittee's Choice Between the Two Alternatives

Tax rebates to the poor or Increased defense spending For defense For rebates For defense Increased defense spendingIncreased defense spending or Across-the-board tax cut For defense For tax cut For tax cut Across-the-board tax cutAcross-the-board tax cut or Tax rebates to the poor For rebates For rebates For tax cut Tax rebates to the poor

THE SUBCOMMITTEE’S RECOMMENDATION

The recommendation will depend on the order in which the subcommittee considers the choices.


Federalism – Experimenting With Federalism – Experimenting With Multiple WaysMultiple Ways


Democracy in the U. S. is characterized by Democracy in the U. S. is characterized by federalism,federalism, meaning that there are multiple meaning that there are multiple layers of government.layers of government.The economic basis for this arrangement is The economic basis for this arrangement is

that it allows those citizens to vote who are that it allows those citizens to vote who are most directly affected by the consequences of most directly affected by the consequences of the choice.the choice.

Fiscal federalism examines the design of a Fiscal federalism examines the design of a federal system of government from an federal system of government from an economic standpoint.economic standpoint.It suggest that decisions should be made by It suggest that decisions should be made by

the level of government most directly the level of government most directly affected by those decisions.affected by those decisions.

Democracy in the U. S. is characterized by Democracy in the U. S. is characterized by federalism,federalism, meaning that there are multiple meaning that there are multiple layers of government.layers of government.The economic basis for this arrangement is The economic basis for this arrangement is

that it allows those citizens to vote who are that it allows those citizens to vote who are most directly affected by the consequences of most directly affected by the consequences of the choice.the choice.

Fiscal federalism examines the design of a Fiscal federalism examines the design of a federal system of government from an federal system of government from an economic standpoint.economic standpoint.It suggest that decisions should be made by It suggest that decisions should be made by

the level of government most directly the level of government most directly affected by those decisions.affected by those decisions.


Even when federal government does not directly Even when federal government does not directly control policies at the state and local level, it often control policies at the state and local level, it often influences these policies through financial influences these policies through financial incentives.incentives.

Another benefit of levels of government is that Another benefit of levels of government is that policies can be tried out on a small scale before they policies can be tried out on a small scale before they are enacted on a large scale.are enacted on a large scale.

There is sometimes conflict between the federal and There is sometimes conflict between the federal and state governments over which has the final say.state governments over which has the final say.

With federalism, different states and localities With federalism, different states and localities conduct elections in different manners.conduct elections in different manners.

Even when federal government does not directly Even when federal government does not directly control policies at the state and local level, it often control policies at the state and local level, it often influences these policies through financial influences these policies through financial incentives.incentives.

Another benefit of levels of government is that Another benefit of levels of government is that policies can be tried out on a small scale before they policies can be tried out on a small scale before they are enacted on a large scale.are enacted on a large scale.

There is sometimes conflict between the federal and There is sometimes conflict between the federal and state governments over which has the final say.state governments over which has the final say.

With federalism, different states and localities With federalism, different states and localities conduct elections in different manners.conduct elections in different manners.




26.226.2CHOICES BY THE VOTERSCHOICES BY THE VOTERS26.226.2CHOICES BY THE VOTERSCHOICES BY THE VOTERS Because we delegate decisions collectively, none of us Because we delegate decisions collectively, none of us

gets exactly what we want.gets exactly what we want. Each candidate for office represents a Each candidate for office represents a bundled good,bundled good,

meaning that the voter can’t pick and choose which meaning that the voter can’t pick and choose which item’s on a candidate’s agenda to support, and which item’s on a candidate’s agenda to support, and which to oppose.to oppose. One vote buys all.One vote buys all.

A second source of concern over government action is A second source of concern over government action is the the principle-agent problem.principle-agent problem.

Public servants are agents of the public (principles).Public servants are agents of the public (principles). This generalized accountability provides a great deal of This generalized accountability provides a great deal of

leeway on the part of the agents to do as they please.leeway on the part of the agents to do as they please.

Because we delegate decisions collectively, none of us Because we delegate decisions collectively, none of us gets exactly what we want.gets exactly what we want.

Each candidate for office represents a Each candidate for office represents a bundled good,bundled good, meaning that the voter can’t pick and choose which meaning that the voter can’t pick and choose which item’s on a candidate’s agenda to support, and which item’s on a candidate’s agenda to support, and which to oppose.to oppose. One vote buys all.One vote buys all.

A second source of concern over government action is A second source of concern over government action is the the principle-agent problem.principle-agent problem.

Public servants are agents of the public (principles).Public servants are agents of the public (principles). This generalized accountability provides a great deal of This generalized accountability provides a great deal of

leeway on the part of the agents to do as they please.leeway on the part of the agents to do as they please.


The median voter modelThe median voter model says that candidates says that candidates will seek the support of the decisive swing voter will seek the support of the decisive swing voter that can tilt the balance from one candidate to that can tilt the balance from one candidate to the other.the other.

The median voter is the one for whom 50% The median voter is the one for whom 50% prefer further to the right on the spectrum, and prefer further to the right on the spectrum, and 50% prefer further to the left.50% prefer further to the left.

In an election the candidate chosen by the In an election the candidate chosen by the median voter will win by garnering a minimum median voter will win by garnering a minimum of just over 50% of the vote.of just over 50% of the vote.

The median voter modelThe median voter model says that candidates says that candidates will seek the support of the decisive swing voter will seek the support of the decisive swing voter that can tilt the balance from one candidate to that can tilt the balance from one candidate to the other.the other.

The median voter is the one for whom 50% The median voter is the one for whom 50% prefer further to the right on the spectrum, and prefer further to the right on the spectrum, and 50% prefer further to the left.50% prefer further to the left.

In an election the candidate chosen by the In an election the candidate chosen by the median voter will win by garnering a minimum median voter will win by garnering a minimum of just over 50% of the vote.of just over 50% of the vote.

The Median Voter ModelThe Median Voter ModelThe Median Voter ModelThe Median Voter Model


The Median Voter ModelThe Median Voter ModelThe Median Voter ModelThe Median Voter Model

Voters:

Left Right

Candidates:

Voter 1Voter 6

Carlos

Voter 2

Voter 3

Voter 4

Voter 5

Voter 7 Voter 9

Voter 8

Darlene

BuckAnn

Voter 5 is the median voter.

By capturing the median vote and four other

voters, Buck wins in any two-way contest.


Rational IgnoranceRational IgnoranceRational IgnoranceRational Ignorance

• Rational ignoranceRational ignorance on the part of voters means on the part of voters means that they make a rational choice to remain that they make a rational choice to remain uninformed on many public choices.uninformed on many public choices.

• Many voting choices are for people rather than Many voting choices are for people rather than specific policy actions.specific policy actions.

• Voters delegate authority to politicians, who in Voters delegate authority to politicians, who in turn delegate to the administrative turn delegate to the administrative bureaucracy.bureaucracy.

• Political parties are in part a response to the Political parties are in part a response to the rational ignorance of voters.rational ignorance of voters.

• Rational ignoranceRational ignorance on the part of voters means on the part of voters means that they make a rational choice to remain that they make a rational choice to remain uninformed on many public choices.uninformed on many public choices.

• Many voting choices are for people rather than Many voting choices are for people rather than specific policy actions.specific policy actions.

• Voters delegate authority to politicians, who in Voters delegate authority to politicians, who in turn delegate to the administrative turn delegate to the administrative bureaucracy.bureaucracy.

• Political parties are in part a response to the Political parties are in part a response to the rational ignorance of voters.rational ignorance of voters.


26.326.3CANDIDATES AND COALITIONSCANDIDATES AND COALITIONS26.326.3CANDIDATES AND COALITIONSCANDIDATES AND COALITIONSo To achieve the results constituents expect, the To achieve the results constituents expect, the

holder of a political office will often find it holder of a political office will often find it necessary to compromise and bargain with necessary to compromise and bargain with other elected representatives.other elected representatives.

o Incumbent politicians routinely get reelected.Incumbent politicians routinely get reelected.o Achieving reelection can be accomplished Achieving reelection can be accomplished

through through logrollinglogrolling – vote trading- in order to – vote trading- in order to obtain projects of direct benefit to constituents.obtain projects of direct benefit to constituents.

o LogrollingLogrolling results in massive spending packages results in massive spending packages that contain numerous local spending projects that contain numerous local spending projects of questionable merit.of questionable merit.

o These projects are often called These projects are often called pork.pork.

o To achieve the results constituents expect, the To achieve the results constituents expect, the holder of a political office will often find it holder of a political office will often find it necessary to compromise and bargain with necessary to compromise and bargain with other elected representatives.other elected representatives.

o Incumbent politicians routinely get reelected.Incumbent politicians routinely get reelected.o Achieving reelection can be accomplished Achieving reelection can be accomplished

through through logrollinglogrolling – vote trading- in order to – vote trading- in order to obtain projects of direct benefit to constituents.obtain projects of direct benefit to constituents.

o LogrollingLogrolling results in massive spending packages results in massive spending packages that contain numerous local spending projects that contain numerous local spending projects of questionable merit.of questionable merit.

o These projects are often called These projects are often called pork.pork.


• When voters focus on visible benefits from When voters focus on visible benefits from projects and ignore the less obvious cost it is projects and ignore the less obvious cost it is referred to as referred to as fiscal illusion.fiscal illusion.

• Fiscal illusion tends to bring about excessive Fiscal illusion tends to bring about excessive spending.spending.

• One check on log-rolling is the One check on log-rolling is the line-item vetoline-item veto powers of many state governors.powers of many state governors.

• The line-item veto allows a governor to veto The line-item veto allows a governor to veto parts of appropriations bills rather than veto parts of appropriations bills rather than veto the bills in their entirety.the bills in their entirety.

• When voters focus on visible benefits from When voters focus on visible benefits from projects and ignore the less obvious cost it is projects and ignore the less obvious cost it is referred to as referred to as fiscal illusion.fiscal illusion.

• Fiscal illusion tends to bring about excessive Fiscal illusion tends to bring about excessive spending.spending.

• One check on log-rolling is the One check on log-rolling is the line-item vetoline-item veto powers of many state governors.powers of many state governors.

• The line-item veto allows a governor to veto The line-item veto allows a governor to veto parts of appropriations bills rather than veto parts of appropriations bills rather than veto the bills in their entirety.the bills in their entirety.

Candidates and CoalitionsCandidates and CoalitionsCandidates and CoalitionsCandidates and Coalitions


Interest Groups – They Pay AttentionInterest Groups – They Pay AttentionInterest Groups – They Pay AttentionInterest Groups – They Pay Attention

The U.S. prides itself on majority rule, yet The U.S. prides itself on majority rule, yet legislation is often influenced by small, well legislation is often influenced by small, well organized minorities.organized minorities.

Special-interest groupsSpecial-interest groups are characterized by a are characterized by a tightly focused agenda and tightly focused agenda and lobbyist ,lobbyist , who are who are agents who promote that agenda within the agents who promote that agenda within the political system.political system.

The agendas of the special interest groups often The agendas of the special interest groups often conflict with the interest of most voters.conflict with the interest of most voters.

The special interest groups are usually able to The special interest groups are usually able to get their way by paying close attention to the get their way by paying close attention to the details of legislator’s votes.details of legislator’s votes.

The U.S. prides itself on majority rule, yet The U.S. prides itself on majority rule, yet legislation is often influenced by small, well legislation is often influenced by small, well organized minorities.organized minorities.

Special-interest groupsSpecial-interest groups are characterized by a are characterized by a tightly focused agenda and tightly focused agenda and lobbyist ,lobbyist , who are who are agents who promote that agenda within the agents who promote that agenda within the political system.political system.

The agendas of the special interest groups often The agendas of the special interest groups often conflict with the interest of most voters.conflict with the interest of most voters.

The special interest groups are usually able to The special interest groups are usually able to get their way by paying close attention to the get their way by paying close attention to the details of legislator’s votes.details of legislator’s votes.


• Legislators who favor special interest know Legislators who favor special interest know they lose votes and campaign contributions.they lose votes and campaign contributions.– Although they vote against the wishes of the Although they vote against the wishes of the

majority they often face no adverse consequences.majority they often face no adverse consequences.

• When the benefits of an action are spread When the benefits of an action are spread broadly and the cost are concentrated, special broadly and the cost are concentrated, special interest are frequently successful at preventing interest are frequently successful at preventing the action from occurring.the action from occurring.

• Lobbying by special interest is efficient when it Lobbying by special interest is efficient when it prevents legislative errors.prevents legislative errors.

• Legislators who favor special interest know Legislators who favor special interest know they lose votes and campaign contributions.they lose votes and campaign contributions.– Although they vote against the wishes of the Although they vote against the wishes of the

majority they often face no adverse consequences.majority they often face no adverse consequences.

• When the benefits of an action are spread When the benefits of an action are spread broadly and the cost are concentrated, special broadly and the cost are concentrated, special interest are frequently successful at preventing interest are frequently successful at preventing the action from occurring.the action from occurring.

• Lobbying by special interest is efficient when it Lobbying by special interest is efficient when it prevents legislative errors.prevents legislative errors.

Interest Groups – They Pay Interest Groups – They Pay AttentionAttention



Special interest lobbying is frequently Special interest lobbying is frequently inefficient because it involves wasteful rent inefficient because it involves wasteful rent seeking.seeking.Rent seekingRent seeking occurs when lobbyist or others occurs when lobbyist or others expend resources in an effort to come out a expend resources in an effort to come out a winner in the political process.winner in the political process.An emerging trend in congress reduces the An emerging trend in congress reduces the problems of special interest by replacing problems of special interest by replacing federal programs with block grants.federal programs with block grants.Block grantsBlock grants represent sums of money represent sums of money designated to go towards a range of state designated to go towards a range of state administered programs.administered programs.

Special interest lobbying is frequently Special interest lobbying is frequently inefficient because it involves wasteful rent inefficient because it involves wasteful rent seeking.seeking.Rent seekingRent seeking occurs when lobbyist or others occurs when lobbyist or others expend resources in an effort to come out a expend resources in an effort to come out a winner in the political process.winner in the political process.An emerging trend in congress reduces the An emerging trend in congress reduces the problems of special interest by replacing problems of special interest by replacing federal programs with block grants.federal programs with block grants.Block grantsBlock grants represent sums of money represent sums of money designated to go towards a range of state designated to go towards a range of state administered programs.administered programs.




26.426.4GOVERNMENT BUREAUCRACYGOVERNMENT BUREAUCRACY26.426.4GOVERNMENT BUREAUCRACYGOVERNMENT BUREAUCRACY

o The employees of the many agencies of The employees of the many agencies of government are commonly referred to as government are commonly referred to as government government bureaucrats.bureaucrats.

o The employees of government agencies have The employees of government agencies have personal agendas that sometimes conflict with personal agendas that sometimes conflict with the intent of voters and their elected the intent of voters and their elected representatives.representatives.

o For both public spirited and self serving For both public spirited and self serving reasons, bureaucrats almost always desire reasons, bureaucrats almost always desire budgets for their agencies that exceed what the budgets for their agencies that exceed what the average citizen and elected official would average citizen and elected official would prefer.prefer.

o The employees of the many agencies of The employees of the many agencies of government are commonly referred to as government are commonly referred to as government government bureaucrats.bureaucrats.

o The employees of government agencies have The employees of government agencies have personal agendas that sometimes conflict with personal agendas that sometimes conflict with the intent of voters and their elected the intent of voters and their elected representatives.representatives.

o For both public spirited and self serving For both public spirited and self serving reasons, bureaucrats almost always desire reasons, bureaucrats almost always desire budgets for their agencies that exceed what the budgets for their agencies that exceed what the average citizen and elected official would average citizen and elected official would prefer.prefer.


Incentives within AgenciesIncentives within AgenciesIncentives within AgenciesIncentives within Agencies

There are several self serving reasons why There are several self serving reasons why government employees want larger budgets government employees want larger budgets for their agencies.for their agencies.

A larger budget is seen as good job A larger budget is seen as good job protection.protection.

It opens up job opportunities and reduces It opens up job opportunities and reduces the threat of lay-offs. the threat of lay-offs.

The larger the budget, the more power and The larger the budget, the more power and prestige you enjoy.prestige you enjoy.

To achieve economic efficiency, the agency To achieve economic efficiency, the agency budget should equal the amount for which budget should equal the amount for which the marginal net benefit is zero.the marginal net benefit is zero.

There are several self serving reasons why There are several self serving reasons why government employees want larger budgets government employees want larger budgets for their agencies.for their agencies.

A larger budget is seen as good job A larger budget is seen as good job protection.protection.

It opens up job opportunities and reduces It opens up job opportunities and reduces the threat of lay-offs. the threat of lay-offs.

The larger the budget, the more power and The larger the budget, the more power and prestige you enjoy.prestige you enjoy.

To achieve economic efficiency, the agency To achieve economic efficiency, the agency budget should equal the amount for which budget should equal the amount for which the marginal net benefit is zero.the marginal net benefit is zero.


The Agency BudgetThe Agency BudgetThe Agency BudgetThe Agency Budget

Agency budget

Efficient budget

Excessive budget

$

(+)

(-)

0

Marginal net benefit=marginal social benefit

- marginal social cost

Gain

Loss

Government agencies have the incentive to seek a budget higher than would be efficient. If the actual budget exceeds that, some of the gain from the agency’s existence is offset by a loss from overspending.


Turf-BuildingTurf-BuildingTurf-BuildingTurf-Building

The struggle over the size of the agency budget The struggle over the size of the agency budget is rather one-sided, because the agency is best is rather one-sided, because the agency is best positioned to know what its spending options positioned to know what its spending options are.are.

Such asymmetric information, in which one Such asymmetric information, in which one party to a transaction knows more than the party to a transaction knows more than the other, puts legislators at a disadvantage in other, puts legislators at a disadvantage in overseeing agencies.overseeing agencies.To preserve your budget, many agencies suggest To preserve your budget, many agencies suggest

cutting something that people would in fact not want cutting something that people would in fact not want you to cut.you to cut.

The struggle over the size of the agency budget The struggle over the size of the agency budget is rather one-sided, because the agency is best is rather one-sided, because the agency is best positioned to know what its spending options positioned to know what its spending options are.are.

Such asymmetric information, in which one Such asymmetric information, in which one party to a transaction knows more than the party to a transaction knows more than the other, puts legislators at a disadvantage in other, puts legislators at a disadvantage in overseeing agencies.overseeing agencies.To preserve your budget, many agencies suggest To preserve your budget, many agencies suggest

cutting something that people would in fact not want cutting something that people would in fact not want you to cut.you to cut.


The strategy of selecting widely supported The strategy of selecting widely supported projects for potential cuts has been used so projects for potential cuts has been used so often that it has acquired its own name – the often that it has acquired its own name – the Washington Monument strategy.Washington Monument strategy.

Using this strategy the agency bluffs by offering Using this strategy the agency bluffs by offering a bare bones budget that cuts most popular a bare bones budget that cuts most popular functions.functions.

There is no easy way to provide the proper There is no easy way to provide the proper incentives for efficiency within the government.incentives for efficiency within the government.

If the government were efficient there would be If the government were efficient there would be no reason to adopt competitive free markets.no reason to adopt competitive free markets.

The strategy of selecting widely supported The strategy of selecting widely supported projects for potential cuts has been used so projects for potential cuts has been used so often that it has acquired its own name – the often that it has acquired its own name – the Washington Monument strategy.Washington Monument strategy.

Using this strategy the agency bluffs by offering Using this strategy the agency bluffs by offering a bare bones budget that cuts most popular a bare bones budget that cuts most popular functions.functions.

There is no easy way to provide the proper There is no easy way to provide the proper incentives for efficiency within the government.incentives for efficiency within the government.

If the government were efficient there would be If the government were efficient there would be no reason to adopt competitive free markets.no reason to adopt competitive free markets.

Turf-BuildingTurf-BuildingTurf-BuildingTurf-Building


26.526.5ADDRESSING GOVERNMENT ADDRESSING GOVERNMENT FAILUREFAILURE

26.526.5ADDRESSING GOVERNMENT ADDRESSING GOVERNMENT FAILUREFAILUREo What can citizens do to counter all of the What can citizens do to counter all of the

incentives within government to spend too incentives within government to spend too much?much?

o Term limits is one possible alternative.Term limits is one possible alternative.o However, term limits deprive the government However, term limits deprive the government

of experienced legislators.of experienced legislators.o They also raise the danger that legislator’s will They also raise the danger that legislator’s will

focus their attention on personal profit focus their attention on personal profit opportunities once they leave office, rather opportunities once they leave office, rather than their public duties.than their public duties.

o What can citizens do to counter all of the What can citizens do to counter all of the incentives within government to spend too incentives within government to spend too much?much?

o Term limits is one possible alternative.Term limits is one possible alternative.o However, term limits deprive the government However, term limits deprive the government

of experienced legislators.of experienced legislators.o They also raise the danger that legislator’s will They also raise the danger that legislator’s will

focus their attention on personal profit focus their attention on personal profit opportunities once they leave office, rather opportunities once they leave office, rather than their public duties.than their public duties.


26.6 EXPLORE &APPLY 26.6 EXPLORE &APPLY GROWING THE GOVERNMENTGROWING THE GOVERNMENT26.6 EXPLORE &APPLY 26.6 EXPLORE &APPLY GROWING THE GOVERNMENTGROWING THE GOVERNMENT

The size of government and its proper The size of government and its proper role has been debated in the U.S. from role has been debated in the U.S. from the day of its founding.the day of its founding.

Most recently, President George W. Bush Most recently, President George W. Bush has pushed through significant increases has pushed through significant increases in government spending and powers to in government spending and powers to combat terrorism.combat terrorism.

The constitution obligates government to The constitution obligates government to promote the public welfare.promote the public welfare.

The size of government and its proper The size of government and its proper role has been debated in the U.S. from role has been debated in the U.S. from the day of its founding.the day of its founding.

Most recently, President George W. Bush Most recently, President George W. Bush has pushed through significant increases has pushed through significant increases in government spending and powers to in government spending and powers to combat terrorism.combat terrorism.

The constitution obligates government to The constitution obligates government to promote the public welfare.promote the public welfare.


Growth of American Government Growth of American Government Since 1929Since 1929

Growth of American Government Growth of American Government Since 1929Since 1929

Percentage

Year

Transfer payments as a percentage of government spending

Government spending as a percentage of GDP


Spending on National DefenseSpending on National DefenseSpending on National DefenseSpending on National Defense

25

20

15 '88 ‘89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99

'00 '01 '02

Defense spending

After a defense buildup in the 1980s, the economy reaped a “peace dividend” in which it reduced spending on defense. That trend toward lower defense spending has now ended.


Terms Along the WayTerms Along the WayTerms Along the WayTerms Along the Way

government failuregovernment failure public choicepublic choice cycling cycling fiscal federalismfiscal federalism bundled goodbundled good principle-agent principle-agent

problemproblem median voter modelmedian voter model rational ignorancerational ignorance median voter modelmedian voter model

government failuregovernment failure public choicepublic choice cycling cycling fiscal federalismfiscal federalism bundled goodbundled good principle-agent principle-agent

problemproblem median voter modelmedian voter model rational ignorancerational ignorance median voter modelmedian voter model

rational ignorancerational ignorance logrolling logrolling fiscal illusionfiscal illusion line-item vetoline-item veto lobbyistlobbyist rent-seekingrent-seeking block grantsblock grants Washington Washington

Monument strategyMonument strategy

rational ignorancerational ignorance logrolling logrolling fiscal illusionfiscal illusion line-item vetoline-item veto lobbyistlobbyist rent-seekingrent-seeking block grantsblock grants Washington Washington

Monument strategyMonument strategy


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. Public choice economics suggest thatPublic choice economics suggest thata.a. markets always fail from the public’s viewpoint.markets always fail from the public’s viewpoint.b.b. opportunities to correct market failure should be opportunities to correct market failure should be

evaluated in light of possibilities for government evaluated in light of possibilities for government failure. failure.

c.c. the public’s choices are equitable, while the public’s choices are equitable, while government choices are efficient.government choices are efficient.

d.d. incentives within government are usually more incentives within government are usually more efficient than those within the marketplace.efficient than those within the marketplace.

1.1. Public choice economics suggest thatPublic choice economics suggest thata.a. markets always fail from the public’s viewpoint.markets always fail from the public’s viewpoint.b.b. opportunities to correct market failure should be opportunities to correct market failure should be

evaluated in light of possibilities for government evaluated in light of possibilities for government failure. failure.

c.c. the public’s choices are equitable, while the public’s choices are equitable, while government choices are efficient.government choices are efficient.

d.d. incentives within government are usually more incentives within government are usually more efficient than those within the marketplace.efficient than those within the marketplace.



2.2. If members of a congressional committee If members of a congressional committee have preferences that would lead to have preferences that would lead to cycling, then the most powerful person on cycling, then the most powerful person on that committee would be the onethat committee would be the one

a.a. with the most endurance.with the most endurance.b.b. with the longest tenure on the committee.with the longest tenure on the committee.c.c. who controls the committee’s agenda.who controls the committee’s agenda.d.d. who is the last to vote.who is the last to vote.

2.2. If members of a congressional committee If members of a congressional committee have preferences that would lead to have preferences that would lead to cycling, then the most powerful person on cycling, then the most powerful person on that committee would be the onethat committee would be the one

a.a. with the most endurance.with the most endurance.b.b. with the longest tenure on the committee.with the longest tenure on the committee.c.c. who controls the committee’s agenda.who controls the committee’s agenda.d.d. who is the last to vote.who is the last to vote.



3.3. Looking at the design of a federal Looking at the design of a federal system of government from an system of government from an economic standpoint, is calledeconomic standpoint, is called

a.a. fiscal federalism.fiscal federalism.

b.b. rational ignorance.rational ignorance.

c.c. a benevolent dictatorship.a benevolent dictatorship.

d.d. the median voter model.the median voter model.

3.3. Looking at the design of a federal Looking at the design of a federal system of government from an system of government from an economic standpoint, is calledeconomic standpoint, is called

a.a. fiscal federalism.fiscal federalism.

b.b. rational ignorance.rational ignorance.

c.c. a benevolent dictatorship.a benevolent dictatorship.

d.d. the median voter model.the median voter model.



4.4. Rational ignorance occurs when Rational ignorance occurs when ___________ does not have time to fully ___________ does not have time to fully research the candidates.research the candidates.

a.a. Political parties.Political parties.

b.b. Bureaucrats.Bureaucrats.

c.c. The public.The public.

d.d. Lobbyist.Lobbyist.

4.4. Rational ignorance occurs when Rational ignorance occurs when ___________ does not have time to fully ___________ does not have time to fully research the candidates.research the candidates.

a.a. Political parties.Political parties.

b.b. Bureaucrats.Bureaucrats.

c.c. The public.The public.

d.d. Lobbyist.Lobbyist.



5.5. The line-item veto provides a check onThe line-item veto provides a check on

a.a. the median voter.the median voter.

b.b. fiscal illusion.fiscal illusion.

c.c. a benevolent dictator.a benevolent dictator.

d.d. logrolling.logrolling.

5.5. The line-item veto provides a check onThe line-item veto provides a check on

a.a. the median voter.the median voter.

b.b. fiscal illusion.fiscal illusion.

c.c. a benevolent dictator.a benevolent dictator.

d.d. logrolling.logrolling.



6.6. Rent-seeking behavior involvesRent-seeking behavior involves

a.a. real estate transactions.real estate transactions.

b.b. illegal government corruption.illegal government corruption.

c.c. measuring the benefits from public measuring the benefits from public housing.housing.

d.d. seeking favors from the government.seeking favors from the government.

6.6. Rent-seeking behavior involvesRent-seeking behavior involves

a.a. real estate transactions.real estate transactions.

b.b. illegal government corruption.illegal government corruption.

c.c. measuring the benefits from public measuring the benefits from public housing.housing.

d.d. seeking favors from the government.seeking favors from the government.


The End!The End!Next Chapter 27Next Chapter 27

““Into the Into the International International Marketplace"Marketplace"

©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 26 “public choice”

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