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Government Failure

Government Failure. Public Choice. Decisions made by the people on what to produce and how much to produce (public goods) are done through collective public voting. Voters put into office those who they think will make the best decisions on their collective behalf.

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Government Failure

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  1. Government Failure

  2. Public Choice • Decisions made by the people on what to produce and how much to produce (public goods) are done through collective public voting. • Voters put into office those who they think will make the best decisions on their collective behalf. • Public choice voting can produce inefficiencies and inconsistencies. (See examples pp. 565-567 in textbook)

  3. GOVERNMENT FAILURE • Gov’t is sometimes inefficient and/or ineffective in economic decision-making. • Good economics and good government are sometimes far apart from one another. • For sound economics in the public sector, decisions are only made as long as MB>MC. • In good politics, programs and policies are supported only when they can maximize someone’s chance at getting elected or re-elected.

  4. Special Interests • Impairs efficient public decision-making • These relatively small groups seek to benefit from government decision making at the risk of loss to a greater number of others. • Politicians fear the loss of funding from these small groups if they legislate against their cause(s). • Because of the possibility of “lost support”, politicians often support special-interest programs and projects that cannot be economically justified.

  5. Rent-Seeking Behavior • Usually seen with corporations, labor unions, and trade associations. • The basis is that these groups seek to make a higher level of economic rent given a certain political agenda. • These groups may be key constituents to a political candidate and that candidate will do all in their power to secure the higher rent for a group. • Examples include: tariffs on foreign products that limit competition and raise prices to consumers; gov’t construction jobs that provide jobs to unions but cost more than the benefits they create, etc.

  6. Clear Benefits, Hidden Costs • Vote-seeking politicians seek to fund projects that will show immediate benefits, but have costs that are vague or deferred. • Those same politicians will reject programs with immediate and easily identifiable costs but with less measurable but very high long-term benefits. • See examples on p. 569 in text.

  7. Limited and Bundled Choice • Citizens are forced to make choices from a smaller group of candidates w/ a smaller package of public goods. • In the public sector, people are forced to “buy” (vote) goods that may not be particularly beneficial to them. • Congress faces the same problem where a large number of spending items are bundled into one piece of legislation.

  8. Bureaucracy and Inefficiency • The private sector is more efficient b/c their goal is a higher profit margin. Gov’t does not have a similar goal. • Gov’t bureaucrats often justify their continued employment by finding new problems to solve. • Politicians who seek to diminish the size of federal agencies (agriculture, education, health & welfare) meet great opposition. • Public agencies, some argue, likely survive and grow due to inefficiency. (larger staffs & increased budgets when programs fail or are unsuccessful)

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