THE ROLE OF GOVERNMENT

PUBLIC CHOICE THEORY

So far we have discussed how the government

intervenes when there is a market failure:

Externalities, positive and negative.

To correct for market failures, the gov. encourages

those things which have positive externalities, and

discourages things with negative externalities.

Examples: taxing or subsidizing

WHEN GOVERNMENT FAILS

The Public Choice theory addresses

the failure of government and how to

balance the evaluation of the role of

government.

PUBLIC CHOICE THEORY

Ideally, in a democratic society, we see the role of

government as trying to improve society.

Political Leaders: wise, just , dedicated, self- sacrificing OR

Stupid, incompetent, corrupt and self-serving

the conventional view is that a responsible electorate can

(and should) vote these less desirables OUT of office.

Therefore, poor leadership is generally to be blamed on

political apathy!

PUBLIC CHOICE THEORY

BUNK! Say the Public Choice

Theorists

When government is studied using the

tools of economics, PCT say it fails more

often than markets fail.

PUBLIC CHOICE THEORY

Why?

• Not much difference in the parties.• Special interest prevails over the

public good• It is rational not to vote• Bureaucrats are inefficient

It is not a matter of getting the right people in

government]

Government fails because bureaucrats want to

maximize their ability to gain votes and power

Self-interest

PUBLIC CHOICE THEORY

People respond to incentive!

Why does self interest lead to the public good in a

private market but not to the public good in the

government sector?

PUBLIC CHOICE THEORY

Key Ideas:

Is it rational for government leaders

to favor special interests over the

general public interest?• Concentrated versus special

interests• Information costs

PUBLIC CHOICE THEORY

Special interests have a big stake in Gov. so big interest.

They give politicians contributions and support ( politicians

KNOW that).

Each member of the public may lose a little when special

interest gets its way, so public doesn’t pay attention.

Public is ignorant.

Politician goes with special interest.

The more concentrated the benefit to the special interest and

the more diffused the cost is to the public, the more likely the

special interest will get its way.

PUBLIC CHOICE THEORY

Why are politicians mainly in the middle of the road?

The median-voter hypothesis predicts that

politicians, regardless of party, will appeal to the

median voter in the constituency they represent.

Politicians will take a more extreme position in the

primary election (when they are appealing to the

median voter in their party) than in the general

election.

PUBLIC CHOICE THEORY

PUBLIC CHOICE THEORY

Why are people rational or irrational when

they spend little time evaluating candidates

before they vote and when they don’t vote?

Concept of rational ignorance.

Why be informed about something when your

vote counts so little? Why even vote?

PUBLIC CHOICE THEORY

If this is true, why do people vote?• The Public choice theory says

voting is a consumption activity.• Voting gives people a feeling that

they did their civic duty.• They can complain without guilt.

What is the effect of bureaucratic entrepreneurs on

government?• Business wants to maximize profits.• A bureaucrat is successful if they maximize their

power.• They are rewarded when they expand the

department.• If they are more efficient , they have a smaller

department• Incentive to expand, not reduce their departments.• Larger means more power, higher salary, bigger

office larger pension, etc.• Activity #58