Holcombe 09

PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe

9CHAPTER

Supply and Demand in Political Markets

PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 9-2

Political MarketsPolitical Markets

Analogous to private sector marketsAnalogous to private sector markets Determine the way resources will be Determine the way resources will be

allocated through public sectorallocated through public sector Why are they important?Why are they important?

1/3 of GDP allocated through them1/3 of GDP allocated through them


Special Interests and Special Interests and Government Programs Government Programs

Special interests provide Special interests provide concentrated benefits to a small concentrated benefits to a small group by making everyone paygroup by making everyone pay

Rational ignorance keeps most Rational ignorance keeps most voters from becoming informedvoters from becoming informed

Programs are decided one at a timePrograms are decided one at a time Favor special interestsFavor special interests


Special Interests and Special Interests and Political ExchangePolitical Exchange

Special interests don’t get everything Special interests don’t get everything they wantthey want

Interests exist on both sides of an Interests exist on both sides of an issueissue

Politicians must weight the demands Politicians must weight the demands of interests on both sides of an issueof interests on both sides of an issue Example:Example: Imposition of a tariff Imposition of a tariff


Special Interests and Special Interests and Political ExchangePolitical Exchange


Representation of Representation of Interests and The Interests and The

Organization of CongressOrganization of Congress Geographic nature of representation Geographic nature of representation

implies orientation towards special implies orientation towards special interestsinterests

Representatives are elected to Representatives are elected to represent their districtsrepresent their districts Example:Example: farming, military bases farming, military bases

Special interests thus have strong Special interests thus have strong influence over local representativesinfluence over local representatives


Logrolling and Political Logrolling and Political ExchangeExchange

LogrollingLogrolling The exchange of political supportThe exchange of political support Not possible in general electionsNot possible in general elections

Large number of votersLarge number of voters Secret ballotSecret ballot

Possible in LegislaturesPossible in Legislatures Small number of legislatorsSmall number of legislators Public votePublic vote


Logrolling and Political Logrolling and Political ExchangeExchange

Legislators care strongly about some Legislators care strongly about some issues because of special interestsissues because of special interests

Do not care strongly about othersDo not care strongly about others Can trade votes on unimportant Can trade votes on unimportant

issues for votes on important onesissues for votes on important ones Logrolling facilitates political Logrolling facilitates political

exchangeexchange


Logrolling and Special Logrolling and Special InterestsInterests

High transactions costs between High transactions costs between citizens and legislatorscitizens and legislators

Special interests have lower Special interests have lower transactions coststransactions costs

Legislators have an incentive to favor Legislators have an incentive to favor special interestsspecial interests

Logrolling helps get special interest Logrolling helps get special interest legislation passedlegislation passed


Logrolling and Economic Logrolling and Economic EfficiencyEfficiency

Logrolling can lead to economic Logrolling can lead to economic efficiency under certain circumstances efficiency under certain circumstances

Coase Theorem applies when:Coase Theorem applies when: Transactions costs are lowTransactions costs are low Small number of votersSmall number of voters

Logrolling is not source of inefficiencyLogrolling is not source of inefficiency Source is high cost of public involvementSource is high cost of public involvement


Logrolling and Economic Logrolling and Economic EfficiencyEfficiency

1 2 3

A $1,000 $1 $2

B $2 $3 $1

C $1 $2 $3

OptionsVoters

Table 9.1 Political Exchange with Cyclical Preferences


Agenda ControlAgenda Control

If political markets not competitive, If political markets not competitive, legislators can act monopolisticallylegislators can act monopolistically

Exhibited through control of agendasExhibited through control of agendas Can move agenda closer to Can move agenda closer to

legislator’s preferencelegislator’s preference Example:Example: A Referendum A Referendum


Agenda ControlAgenda Control


Agenda Control in the Agenda Control in the Real WorldReal World

Model can be extended to:Model can be extended to: CommitteesCommittees Political racesPolitical races

Does not have to be overtDoes not have to be overt Example:Example: Arthur Burns Arthur Burns


Rent SeekingRent Seeking

Interest groups expend resources in Interest groups expend resources in lobbyinglobbying

From a social standpoint, these From a social standpoint, these resources are wastedresources are wasted

Resources expended to secure Resources expended to secure private benefit that do not add to private benefit that do not add to social outputsocial output Examples:Examples: tariffs, price supports tariffs, price supports


The Welfare Costs of The Welfare Costs of Rent SeekingRent Seeking


Public Sector SuppliersPublic Sector Suppliers

No profit-maximizing incentiveNo profit-maximizing incentive Incentive to maximize budgetsIncentive to maximize budgets Bureaucrats benefit from higher Bureaucrats benefit from higher

budgets because they lead to:budgets because they lead to: Higher incomesHigher incomes Increased powerIncreased power Better working conditionsBetter working conditions


The Public Interest and The Public Interest and Budget MaximizationBudget Maximization

Bureaucrats tend to believe in the Bureaucrats tend to believe in the mission of their bureausmission of their bureaus

Budget maximization can further a Budget maximization can further a bureaucrat’s perception of the public bureaucrat’s perception of the public interestinterest

What if it budget maximization is not What if it budget maximization is not in the public interest? in the public interest? Individual still has incentive to act in her Individual still has incentive to act in her

own self-interestown self-interest


The Public Sector The Public Sector Bargaining ProcessBargaining Process

Bureau’s output and budget are Bureau’s output and budget are determined simultaneouslydetermined simultaneously Bureau makes all-or-nothing saleBureau makes all-or-nothing sale

Bureau’s bargaining advantageBureau’s bargaining advantage SpecializationSpecialization Information controlInformation control Committees compositionCommittees composition

Able to obtain budgets larger than Able to obtain budgets larger than optimaloptimal


The Bureaucratic The Bureaucratic Bargaining ProcessBargaining Process


The Government as an The Government as an Interest GroupInterest Group

Government employees are also an Government employees are also an interest groupinterest group

Government experts exert Government experts exert considerable influenceconsiderable influence

Why programs perpetuate Why programs perpetuate themselvesthemselves


Fiscal FederalismFiscal Federalism

The impact of special interests can The impact of special interests can be reduced through fiscal federalismbe reduced through fiscal federalism

Three reasons why:Three reasons why: Concentration of costsConcentration of costs Choice among governmentsChoice among governments Facilitates Inter-government comparisonFacilitates Inter-government comparison

Holcombe 09

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