Beyond Efficiency…And Government Failure

It’s Not Just Efficiency

• Other values matter in determining what achieves the “good society”

Social Welfare• Importance of an index of social utility• Utilitarian– Consequentialist– Greatest good (not for the greatest number)

• Rawlsian– Maximize the minimum– Greatest benefit for least advantages– Veil of ignorance…original position

• Multiplicative– Maximize average utility

Problems with Social Welfare Function

• Can it be observed?– Idea of no envy

• Social welfare function must be specified– Ultimatum study (back to last week and Pareto

allocations)• Limits in information and cognition will hinder

practical use• Tend to focus only on immediate

consequences

Different Types of Utilitarianism?

• Act– Rightness of an act depends on the utility that it

produces

• Rule– Rightness of an act depends on its adherence to

general rules or principles that advance social utility

• Post-Katrina example…

Ways to Measure Social Welfare• GDP– Market value of the output of final goods and services

produced within the country in a specific time period– Real GDP and NDP

• Unemployment• Inflation• Balance of Payments• Infant mortality? Crime rates? Adult life

expectancy? Smog-free days in air sheds? Educational achievment?

Substantive Values Beyond Efficiency

• Human Dignity– We need something to participate in a market– Society needs to help people compete– Minimum level of consumption is the bar

• Equality of Outcomes– Vertical equity?– If we reallocate, people will be less productive– Need to control for this

• Does a rising tide raise all boats?• Role of fairness in policy compliance

Measurement Issues

• Look at income…– Not all wealth is fully reflected in measured

income– Tax and transfer programs play a role• How do we factor in housing or health care??

– We normally consume as members of household, not individuals

Index Issues

• Need indices if we are talking about distributions– Mean and median don’t work

• Gini index– Lorenz curve

• Rank the population by a trait and ask what percentage of that goes to the poorest X percent of the population?

– Gini index is proportional to the area between perfect equality and the Lorenz curve for distribution

– 0 is perfect equality; coefficients closer to 1 correspond to less equality

Categorization Issues

• Difficulties in drawing inferences from intergroup comparisons

• We also have silent losers– Unexpected losses– Lack of connection between losses and policy– Losers may be silent

Instrumental Values

• Political feasibility– Politicians favor policies favored by their

constituencies

• Revenues/Expenditures– Less public expenditures will be more likely to

happen– Expenditure levels can be viewed as a measure of

governmental effort

Government Failure

• We need to be careful advocating for public interventions in private affairs

• Some market failures shouldn’t be fixed; some distributional goals simply cost too much

• Government failures are problems inherent in four general features of political systems– Direct Democracy– Representative Government– Bureaucratic Supply– Decentralized Government

Direct Democracy

• If voting was the best proxy, public policy analysis would be VERY easy

• Even more difficult if we allow for opportunistic voting– Sophisticated voting

• Controlling the agenda is a key to getting to manipulate the social choice

Direct Democracy

• Preference Intensity– The bridge building example

• Landslide victories do not indicate mandates– Defense spending and trade examples

Representative Government

• Must choose between good society and preferences of constituencies at times

• Hold own private interests• Individuals must monitor them• Party discipline can play a role

Rent Seeking

• Using government to restrict competition is perhaps the oldest form of rent seeking

• Setting price floors• Problem is, once government guarantees a

price above market clearing levels, price of the land will rise to match it

Other Issues with Representation• District-based Legislature

– Heterogeneous preferences– Imagine 100 legislatures each representing 100 constituents…– District v. national welfare– Logrolling

• Electoral cycles– Will choose policy options that have immediate impact, even if it may

fail in long-run– Vulnerability and opponent matter as well

• Posturing to Public Attention– We rely on the media to monitor public affairs– Policy windows– Policy agendas as a result do not always match social welfare– Different views of sunk costs

Bureaucratic Supply

• Nature of public agencies makes monitoring difficult and inefficiency likely

• Agency loss (PrincipalAgent)• Discretionary budget– Difference between allocation and minimum cost

of meeting outputs– Why does this relate to bureaucracy?

• Difficult to value outputs• X-inefficiency in bureaucracy?

Bureaucratic Supply

• Difficulties in innovations– Imitation– $– Civil service rules (ex ante controls)

• Emphasize hiring• But too much time is bad too

• Organizational public goods– Reputation– Central stock– Personal use of resources

Decentralization

• What is it?• Brings citizens closer to public decisions• Hinders implementation– Why?

• Positive and negative fiscal externalities