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Interventions. Lesson 22: Public Choice Theory: What if the Government Fails (Duh!). The Rules of the Game. Rule of Law exists when rules that govern behavior and interactions among individuals and groups of individuals apply to both the governed and the governing.

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Interventions

Interventions

Lesson 22: Public Choice Theory: What if the Government Fails (Duh!)


The rules of the game
The Rules of the Game

  • Rule of Law exists when rules that govern behavior and interactions among individuals and groups of individuals apply to both the governed and the governing.

  • Rule of Man exists when laws are applied at the discretion of the governing.

  • Under the Rule of Force, people own what they can defend.


Source: United States Department of Agriculture


Things to Ponder

  • When big (flat) screen TVs were first introduced in the 1990s they were extremely expensive and very few households owned one.

  • Over time there was increased competition among producers as well as technological advancements in the production process.

  • Over the same period average household incomes also rose significantly.


State

Minimum Wages

  • One of the less-noted results of the 2006 mid-term elections was that six states voted to join the 22 that have already raised the minimum wage above the federally mandated $5.15/hour.

  • In subsequent legislation, the newly elected Congress imposed the increase on the remaining states, with the minimum wage rising to $6.50/hour in July 2008 and then to $7.25/hour in 2009.


Questions to Ponder

  • What effects does limiting legal immigration have on our economy and labor markets?

  • What effects do minimum wage increases have on immigration (legal or illegal)?

  • What is the best way to help low skilled workers?


Other

Questions to Ponder

Why do houses ↑ in price after purchase, while automobiles ↓ in price after purchase?

How do consumers respond to price changes for the following goods/services?

Salt

Public transportation

Gasoline


Government and the market
Government and the Market

  • Governments can fail to produce an efficient allocation of resources for a number of reasons:

    • Measurement of social damages and benefits is difficult and imprecise.

    • There is no precise mechanism for determining citizens’ preferences for public goods.

    • Government agencies are not subject to the discipline of the market.

    • It is naïve to expect elected and appointed officials to act selflessly for the good of society.


Public choice theory
Public Choice Theory

  • The idea of government failure is at the center of public choice theory, which holds that public officials who set economic policies and regulate the players act in their own self-interest, just as firms do.


Public choice
Public Choice

  • Public Choice is the study of how government actions result from the self-interested behaviors of voters and politicians.

  • Self-interested behavior is present in both the public and private sectors, it only differs in the way it plays out.


Public choice conclusions
Public Choice Conclusions

  • Self-interest directs public sector activity, just as it directs market activity.

  • Government actions (like price ceilings or floors) are often enacted for political gain, not as a remedy for economic inefficiency.

  • This is called Rent-seeking.

    • Gaining profit without competing

    • Gaining something not earned


Government failure
Government Failure

  • James Buchanan, who received the 1986 Nobel Prize in Economics, argues that inefficiencies arise when decisions are removed from the private sector and turned over to elected representatives.

  • The government is amarket—a market for votes, power, etc., and the same problems that arise in all markets arise in government decision making.


Bureaucracy building
Bureaucracy Building

  • Rent seekingandlogrolling, an inefficiency in the political process in which legislators support one another’s projects in order to ensure support for their own, can lead to government failure.

  • Since the government is not a profit-maximizing entity, it has no incentive to minimize costs. Instead, what often occurs is bureaucracy building.


Public choice theory1
Public Choice Theory:

Like private individuals, elected officials act in their best interests.

Elected officials’ abilities to accomplish their goals depend on being elected (and re-elected).

Elected officials have an incentive to pay more attention to those constituents who are able and likely to influence the election.

The power of Special Interest Groups derives from the distribution of benefits and costs


Concentrated benefits and diffuse costs vote for
Concentrated Benefits and Diffuse Costs? Vote “For!”

Big benefit to a small but organized group of voters

Small cost to a large number of unorganized, sometime voters


Legislators tend to vote
Legislators tend to vote:

FOR:

legislation that confers significant benefits on relatively small (but organized and active) groups and imposes small costs on the public at large

AGAINST:

legislation that imposes costs on small (but organized and active) groups and deprives the public at large of relatively small benefits


Public choice theory2
Public Choice Theory:

Like private individuals, elected officials act in their best interests.

Elected officials’ abilities to accomplish their goals depend on being elected (and re-elected).

Elected officials have an incentive to pay more attention to those constituents who are able and likely to influence the election.

The power of Special Interest Groups derives from the distribution of benefits and costs


Rational ignorance
Rational Ignorance

Do you know your US Senators?

Do you know your US Congressional representative?

What did they do today?

What will they do tomorrow?

They spend your money!


Rational ignorance1
Rational Ignorance

  • Do things as long as MB>MC.

  • MC of analyzing legislation dealing with policy issues.

  • MB of analyzing legislation dealing with policy issues.

  • Are people rationally ignorant?


The incentive to expand government activities beyond the point where MB = MC is explained by public choice theory.

Libido dominandi


Key ideas in public choice economics
Key Ideas in Public-Choice Economics point where MB = MC is explained by public choice theory.

  • Is it rational for government leaders to favor special interests over the general public?

    • Concentrated vs. special interests

    • Information costs

  • Why are politicians mainly in the middle of the road?

    • Median-voter model of political behavior

  • Are people rational or irrational when they spend little time evaluating candidates before they vote and when they don’t vote?

  • What is the effect of bureaucratic entrepreneurs on government?


There's a funny moment in tonight's episode where Sheldon gets stuck on a rock-climbing wall and remarks, "What part of an inverse tangent function approaching an asymptote don't you understand?" I thought it'd be helpful to take a moment and examine that joke. A linear asymptote is essentially a straight line to which a graphed curve moves closer and closer but does not reach. In other words, given a function y=fn(x) with asymptote A, A represents a number that, no matter how big (or, given the function, small) you make x, y will never make it to A. The particular example Sheldon quotes is the inverse Tangent function, or Arctangent, which has two asymptotes. If you graph it, it sort of looks like a horizontal S:

No matter how big you make x (that is, how far you move to the right), the function is never going to hit that top line (π/2), and no matter how small x gets (moving to the left), y is never going to be smaller than - π/2.The more you know, the funnier it gets.


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