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CHAPTER 9 Supply and Demand in Political Markets PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe Political Markets Analogous to private sector markets Determine the way resources will be allocated through public sector Why are they important? 1/3 of GDP allocated through them PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-2 Special Interests and Government Programs Special interests provide concentrated benefits to a small group by making everyone pay Rational ignorance keeps most voters from becoming informed Programs are decided one at a time Favor special interests PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-3 Special Interests and Political Exchange Special interests don’t get everything they want Interests exist on both sides of an issue Politicians must weight the demands of interests on both sides of an issue Example: Imposition of a tariff PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-4 Special Interests and Political Exchange PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-5 Representation of Interests and The Organization of Congress Geographic nature of representation implies orientation towards special interests Representatives are elected to represent their districts Example: farming, military bases Special interests thus have strong influence over local representatives PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-6 Logrolling and Political Exchange Logrolling The exchange of political support Not possible in general elections Large number of voters Secret ballot Possible in Legislatures Small number of legislators Public vote PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-7 Logrolling and Political Exchange Legislators care strongly about some issues because of special interests Do not care strongly about others Can trade votes on unimportant issues for votes on important ones Logrolling facilitates political exchange PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-8 Logrolling and Special Interests High transactions costs between citizens and legislators Special interests have lower transactions costs Legislators have an incentive to favor special interests Logrolling helps get special interest legislation passed PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-9 Logrolling and Economic Efficiency Logrolling can lead to economic efficiency under certain circumstances Coase Theorem applies when: Transactions costs are low Small number of voters Logrolling is not source of inefficiency Source is high cost of public involvement PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-10 Logrolling and Economic Efficiency Table 9.1 Political Exchange with Cyclical Preferences Options Voters 1 2 3 A $1,000 $1 $2 B $2 $3 $1 C $1 $2 $3 PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-11 Agenda Control If political markets not competitive, legislators can act monopolistically Exhibited through control of agendas Can move agenda closer to legislator’s preference Example: A Referendum PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-12 Agenda Control PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-13 Agenda Control in the Real World Model can be extended to: Committees Political races Does not have to be overt Example: Arthur Burns PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-14 Rent Seeking Interest groups expend resources in lobbying From a social standpoint, these resources are wasted Resources expended to secure private benefit that do not add to social output Examples: tariffs, price supports PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-15 The Welfare Costs of Rent Seeking PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-16 Public Sector Suppliers No profitprofit-maximizing incentive Incentive to maximize budgets Bureaucrats benefit from higher budgets because they lead to: Higher incomes Increased power Better working conditions PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-17 The Public Interest and Budget Maximization Bureaucrats tend to believe in the mission of their bureaus Budget maximization can further a bureaucrat’s perception of the public interest What if it budget maximization is not in the public interest? Individual still has incentive to act in her own self--interest self PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-18 The Public Sector Bargaining Process Bureau’s output and budget are determined simultaneously Bureau makes allall-or or--nothing sale Bureau’s bargaining advantage Specialization Information control Committees composition Able to obtain budgets larger than optimal PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-19 The Bureaucratic Bargaining Process PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-20 The Government as an Interest Group Government employees are also an interest group Government experts exert considerable influence Why programs perpetuate themselves PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-21 Fiscal Federalism The impact of special interests can be reduced through fiscal federalism Three reasons why: Concentration of costs Choice among governments Facilitates InterInter-government comparison PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 9-22