1. ECO 481: Public 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 doesn’t serve oneself.
No pricing mechanism to insure that allocation 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 in public welfare.
Bridge 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 (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.”

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 can’t vote now.
how do you benefit from catering to LR concerns?
Social Security, Health Care.

8. 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.”

9. 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!

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.
Arrow’s impossibility theorem.
Are districts good or bad? How drawn?

11. 6. Electoral Rules and Distorting preferences (con’t.)
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

12. 7. 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.

13. 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?

14. ECO 481: Public Choice Theory
Government Failure -
Pathological Politics
Dr. Dennis Foster