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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