ECO 481: Public Choice Theory Week 5: Free & Forced Riders, Producer-Rigged Markets, Rent-Seeking Dr. Dennis Foster

The Supply Problem We can “imagine” the optimal level. There still will be free riding. pri. benefits costs Quantity $ pub. benefits So, what is Q2? So, how do you decide on payment? Tax can’t be equal can it? Do we know “willingness to pay?”. Q1 Q2

The Supply Problem In market, we adjust Q to make MB=MC. There are very few purely public goods. Markets try to transform in quasi-private goods. – TV, radio, fenced in rangeland. Political determination of differing preferences. Nobody gets what they want! Probably lessens WTP. “If everyone is unhappy…”

The Supply Problem Too much or too little? If benefits are long-run, under provide. If costs are long-run, over provide. If public accepts “publicness” and financing tied to production, outcome is likely close to “optimal.” Producers of public good biased towards too much. – Pentagon example – Schools and bus systems – Goldwater report.

Privatizing Road pricing in Hong Kong. – Singapore & London. Private roads- Stossel videovideo Private parks? – Meteor Crater, Mt. Vernon, Grand Canyon Caverns. Education - vouchers as start. “Merit goods?” – Flagstaff: “amenities.”

Producer-Rigged Markets We benefit from competition. Firms don’t like to compete!! Cartels - benefit firms at expense of consumers. Welfare loss. Transfer Rent seeking = loss Free riders - coffee.

Producer-Rigged Markets The government as enforcer. Thousands of trade associations/lobbyists. “[T]hey do not visit monuments or museums. They are rent seekers and protectors. They have become so because simple majority rule enables and encourages exploitation. From this rule stems log rolling and thence a transfer society in which short-run gains prevail over long-run general losses.”

Rent-Seeking Use of resources that result in negative social value Historically overlooked – problem only of lost . Historically overlooked – problem only of lost . Direct costs are most public: Direct costs are most public: – Entertainment expenses written off. – Proliferation of trade groups and employees. Indirect costs are more damaging: Indirect costs are more damaging: – Difficult to measure. – Waste of time, energy, talent. – Accounts for lack of development in So. America, China. What will be cost to U.S. of the elderly as rent-seekers? What will be cost to U.S. of the elderly as rent-seekers?

The Costs of Protection Tariffs - deadweight loss... Maritime industry. Autos: – Unions get higher wages. – Est. $4 bill. transfer from buyers. – Est. $160,000 per job saved. – Partly responsible for collapse of 2008? Farm policy: – price controls, acreage restrictions. – transfers to 1% of pop.

Limits to Protection Opposing forces: – Protect steel - raise costs to autos. Additional issues - use less steel and more plastic. – Exporters and their unions. Some conclusions: more sellers 1. The more sellers, the harder it is to form a cartel. more non-homogeneous 2. The more non-homogeneous the product, the harder it is to form a cartel. more excess capacity 3. The more excess capacity, the harder it is to form a cartel.

ECO 481: Public Choice Theory Week 5: Free & Forced Riders, Producer-Rigged Markets, Rent-Seeking Dr. Dennis Foster