Transcript The Role of Government in the American Economy

CHAPTER
9
Supply and Demand in
Political Markets
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
Randall Holcombe
Political Markets
Analogous to private sector markets
 Determine the way resources will be
allocated through public sector
 Why are they important?

 1/3
of GDP allocated through them
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Special Interests and
Government Programs
Special interests provide concentrated
benefits to a small group by making
everyone pay
 Rational ignorance keeps most voters
from becoming informed
 Programs are decided one at a time

 Favor
special interests
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Special Interests and Political
Exchange
Special interests don’t get everything
they want
 Interests exist on both sides of an issue
 Politicians must weight the demands of
interests on both sides of an issue

 Example:
Imposition of a tariff
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Special Interests and Political
Exchange
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Representation of Interests and
The Organization of Congress
Geographic nature of representation
implies orientation towards special
interests
 Representatives are elected to represent
their districts

 Example:

farming, military bases
Special interests thus have strong
influence over local representatives
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Logrolling and Political
Exchange
Logrolling
 The exchange of political support
 Not possible in general elections

 Large
number of voters
 Secret ballot

Possible in Legislatures
 Small
number of legislators
 Public vote
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Logrolling and Political
Exchange
Legislators care strongly about some
issues because of special interests
 Do not care strongly about others
 Can trade votes on unimportant issues for
votes on important ones
 Logrolling facilitates political exchange

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Logrolling and Special
Interests
High transactions costs between citizens
and legislators
 Special interests have lower transactions
costs
 Legislators have an incentive to favor
special interests
 Logrolling helps get special interest
legislation passed

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Logrolling and Economic
Efficiency
Logrolling can lead to economic
efficiency under certain circumstances
 Coase Theorem applies when:

 Transactions
costs are low
 Small number of voters
Logrolling is not source of inefficiency
 Source is high cost of public involvement

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Logrolling and Economic
Efficiency
Table 9.1 Political Exchange with Cyclical
Preferences
Options
Voters
1
2
3
A
$1,000
$1
$2
B
$2
$3
$1
C
$1
$2
$3
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Agenda Control
If political markets not competitive,
legislators can act monopolistically
 Exhibited through control of agendas
 Can move agenda closer to legislator’s
preference

 Example:
A Referendum
PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
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Agenda Control
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Agenda Control in the Real
World

Model can be extended to:
 Committees
 Political

races
Does not have to be overt
 Example:
Arthur Burns
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Rent Seeking
Interest groups expend resources in
lobbying
 From a social standpoint, these resources
are wasted
 Resources expended to secure private
benefit that do not add to social output

 Examples:
tariffs, price supports
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The Welfare Costs of Rent
Seeking
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Public Sector Suppliers
No profit-maximizing incentive
 Incentive to maximize budgets
 Bureaucrats benefit from higher budgets
because they lead to:

 Higher
incomes
 Increased power
 Better working conditions
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The Public Interest and
Budget Maximization
Bureaucrats tend to believe in the
mission of their bureaus
 Budget maximization can further a
bureaucrat’s perception of the public
interest
 What if it budget maximization is not in
the public interest?

 Individual
still has incentive to act in her own
self-interest
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The Public Sector Bargaining
Process

Bureau’s output and budget are
determined simultaneously
 Bureau

makes all-or-nothing sale
Bureau’s bargaining advantage
 Specialization
 Information
control
 Committees composition

Able to obtain budgets larger than
optimal
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The Bureaucratic Bargaining
Process
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The Government as an
Interest Group
Government employees are also an
interest group
 Government experts exert considerable
influence
 Why programs perpetuate themselves

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Fiscal Federalism
The impact of special interests can be
reduced through fiscal federalism
 Three reasons why:

 Concentration
of costs
 Choice among governments
 Facilitates Inter-government comparison
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