Understanding Government And Government Failure

It is fruitful to analyze the public sector in the same way in which we analyze the private sector. Collective action, through government, has the potential for correcting market failures and redistributing income, The public sector is an alternative to the market-it provides an alternative means of organizing production and/or distributing output.

Voters cast ballots, make political contributions, lobby, and adopt other political strategies to demand public-sector action. Other things constant, voters have a strong incentive to support the candidate who offers them the greatest personal gain relative to personal costs. Obtaining information is costly. Since group decision-making breaks the link between the choice of the individual and the outcome of the issue, it is rational for voters to remain uninformed on many issues. Candidates are generally evaluated on the basis of a small subset of issues that are of the greatest personal importance to individual voters.

Market failure presents government with an opportunity to undertake action that will result in additional benefits relative to costs. Other things constant, the greater the social loss resulting from the market failure, the stronger is the incentive for public-sector action.

Positive economics cannot tell us whether an action should be conducted in the public or in the market sector. However, analysis of how both sectors operate does help build the case for conducting any given activity in either sector. When market failure is prevalent, the case for public sector action is strengthened. On the other hand, expectation of government failure reduces the strength of the argument for government intervention.

There is a strong incentive for political entrepreneurs to support special interest issues and to make the issues difFicult for the unorganized, largely uninformed majority to understand. Special interest groups supply both financial and direct elective support to the politician. Constitutional rules are one way to limit the power of special interests to use the political process to achieve their interests at the expense of the group as a whole.

Because of imperfect voter information, proposals whose benefits are elusive and whose costs are clear-cut tend to be rejected, even though they might promote the community's welfare. Counterproductive policies whose benefits are easily recognizable and whose costs are difficult to identify tend to be accepted. There is a strong incentive for politicians to package public policy in a manner that amplifies the benefits and conceals the costs imposed on voters.

The shortsightedness effect is another potential source of conflict be tween good politics and sound economics. Both voters and politicians tend to support projects that promise substantial current benefits at the expense of difficult-to-identify future costs. There is a bias against legislation that involves immediate and easily identifiable costs but complex future benefits.

The economic incentive for operational efficiency is small for public sector action. No individual or relatively small group of individuals can capture the gains derived from improved operational efficiency. There is no force analogous to the threat of bankruptcy in the private sector that will bring inefficient behavior to a halt. Since public sector re sources, including tax funds, are communally owned, their users are less likely than private resource owners to be cost conscious.

A growing portion of public-sector activity involves income redistribution. Economic analysis indicates two potential sources of pressure for income redistribution: (a) the public-good nature of antipoverty efforts and (b) self-interest. From the viewpoint of a vote-maximizing politician, there is incentive to support redistribution from unorganized to well-organized groups. Considerable income redistribution in the United States is of this type.