Monday, May 23, 2011

Public Choice Theory

In class we discussed the differences between the ways that markets allocate resources ( using prices which reflect trade-offs based on the knowledge and preferences of millions of individuals) vs government (which allocates resources using command and control based on the more limited knowledge and preferences of a few voters, elected officials, or appointed bureaucrats).

The economic analysis of political institutions represents a sub field of economics referred to as 'Public Choice Economics.' The following link will take you to an article 'The Public Choice Revolution', Regulation Fall 2004.

This article summarizes some of the major findings from the field of public choice. The article discusses among many things, why do we need government, and what are the tradeoffs between tyranny (or Leviathan ) and anarchy.

"Once it is admitted that the state is necessary, positive public choice analyzes how it assumes its missions of allocative efficiency and redistribution. Normative public choice tries to identify institutions conducive to individuals getting from the state what they want without being exploited by it."

Another section looks at the analysis of voting. It discusses problems with using voting to allocate resources, such as cycling and the median voter theorem. It also looks at issues related to special interests, bureaucracies, and the role of representative government in democratic systems.

"In our democracies, voters do not decide most issues directly. In some instances, they vote for representatives who reach decisions in parliamentary assemblies or committees. In other instances, they elect representatives who hire bureaucrats to make decisions. The complexity of the system and the incentives of its actors do not necessarily make collective choices more representative of the citizens’ preferences."

Particularly the article looks at how more government with a larger budget leads to more power for special interests:

"Interest groups will engage in what public choice theorists call “rent seeking,” i.e., the search for redistributive benefits at the expense of others. The larger the state and the more benefits it can confer, the more rent-seeking will occur. “The entire federal budget,” writes Mueller, “can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle.”

The moral of the public choice story is that democracy and governments are not perfect. When we have issues with market outcomes and we are thinking about new regulations or government spending to correct those problems, public choice analysis offers a guide. Public choice analysis implies that we have to question which system will provide the best information and incentives to act on that information to achieve the results that we want. The democratic process itself offers no guarantee that the decision will be the best solution to our problems.
Concepts related to public choice theory include the following:

RENT SEEKING -  the act of seeking special privileges or protections form the government.

TYPE TWO ERROR BIAS - overcautious behavior, ex: FDA drug approval, response to Hurricane Katrina

VOTING PARADOXES- randomness of election outcomes

MEDIAN VOTER THEOREM- leads to exploitation of minority by majority

TRAGEDY OF THE COMMONS – lack of property rights and pollution

COASE THEOREM – symmetry of environmental pollution, internalizing effect of property rights and markets

TRAGEDY OF THE ANTICOMMONS – underutilized resources due to excessive checks on power, bureaucracy. Ex: response to hurricane Katrina

KNOWLEDGE PROBLEM- government relies on a ‘shrunken’ pool of knowledge vs. markets

By clicking the ‘public choice’ link below, or under the ‘labels’ sidebar you can find more detailed discussions of each of these concepts