STATES AS THE PROBLEM
The Predatory State
1. Power to Protect Property = Power to
Take Property
2. Fiscal Illusion (citizen’s limited
information)
Accountability/Responsiveness (is oversight
possible?)
B. Transaction Costs
1. Over Regulation
2. Bureaucratic Red Tape
3. Leads to inefficiencies
C. Command and Control regulations
a. Agency Capture
b. Inflexible/inefficient
D. Incentives: Pollution Tax; Grants; Credits
a. Still requires enforcement
I. PRIVATE INSTITUTIONS AS SOLUTIONS TO
COLLECTIVE ACTION PROBLEMS
A. Govt. actions are not the only type of institutions to help
solve collective action problems or make sure we act
responsibly.
Markets: the need and desire to make a profit lead people to
form networks of social interactions to effectively produce
goods and services
Religion: Churches provide and communicate values and
norms that facilitate social interactions (do one to others)
Private associations: groups and organizations form to solve
collective action problems. Homeowners associations
form to make sure that property in the area are maintained
so that order exists and property values increase.
B. The Private sector is preferred for the usual
reasons
1. Maximizes voluntary choice, personal liberty, freedom
2. Maintains economic efficiency
3. individual business success = national economy
success
C. When government intervenes it should be to
remedy problems arising from workings of
market.
D. Government intervention might work better if it
approximates as much as possible the workings of
the marketplace (i.e., incentives and disincentives)
II. SOURCES OF MARKET FAILURE
A. Unequal Access to Information
B. Monopoly
C. Fluidity of resources - or lack there of
(entry and exit costs)
D. Third party effects (externalities)
1. Positive
2. Negative
E. Merit goods & the unacceptability of Individual
Preferences
1. Religious and humanist impulses
2. Aesthetic, artistic
3. Criminal justice
F. The Production of Public goods & Private goods
1. Excludability
2. Non-rivalry
3. Pure Private goods - excludable and rivalrous
4. Private goods with negative externalities
5. Toll goods - excludable but nonrivalrous
6. Common pool resources - nonexcludable but
rivalrous
7. Pure Public Goods - nonexcludable & nonrivalrous
III. GOVERNMENT GROWTH AS A FUNCTION OF
MARKET FAILURE:
Conditions that are needed to be met in order to
produce market efficiency:
1) Property rights need to be defined and secured.
a. Complexity of property rights
b. This facilitates trust and then trade
c. How is this done?
- Private enforcement (mob, etc.)
- Public enforcement (Government)
-common law
-statutory law
-enforcement of contracts
-planning and zoning
-war
2) information regarding goods and services (and alternatives) is readily
available and widely shared
3) the number of producers and/or consumers is sufficiently large to prevent
any individual producer or consumer from exercising identifiable
control over prices or supply (microsoft, kellogs, etc.)
4) transactions for various goods and services affect only those who
produce them. (no positive or negative externalities).
5) related excludability (those who do not pay for a given good or service
are prevented from receiving any utility from the production or
consumption of that good or service. No free riders
6) transaction costs are relatively low (relates to #1). Uncertainty in the
private sphere produces transaction costs. PE think good public policy
should try and lower the transaction costs of market interactions. (note:
private attempts to lowering transactions costs – insurance, BBB).
IV.
MANAGING MARKET FAILURE:
CREATING GOVERNMENT
A. Regulatory approaches
EPA - Command and Control regulations
FTC and Consumer Fraud
Banking Regulation – Glass-Steagall
B. Market-like approaches
Individuals and courts (common law)
Incentives (pollution credits, tax breaks)
Limitations?
C. The No response responses
Do we really need a national defense?
Inequality
Pollution
Transaction costs
V. GROWTH IN GOVERNMENT:
The Demand for Regulation/Incentives
I. Introduction: While there are logical rationales
for regulation, there is also a political dynamic
involved, based on the motivation that
individuals have because of the distribution of
costs/benefits
A. It is people promoting or resisting policy that
actually affects the scope of government.
Government grows for a reason, usually in
response to demands. But by who?
B. There are other things that affect who
promotes or resists:
1. Formal institutions: access to government
2. Political participation: eligibility
requirements, etc.
3. Distribution of political resources: prestige,
skill, money
VI.
MANAGING GOVERNMENT
FAILURE
• Political Economy Approach
• What determines government choices?
• Rational Individuals responding to
institutional rules
Policy Actors
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What they should do
What they can do
What they want to do
What they need to do
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Why to policy actors act the way they do?
Because they are evil?
Because they are self-interested
Responding to Incentives
Responding to Constraints
What are the incentives and constraints
that policy actors face?
Government oversees the Market but
who oversees the government?
• Interest groups
• Other government agencies: separation of
powers
• Institutional rules that provide incentives to
act in an appropriate way: sunshine laws;
campaign finance laws, etc.
• Citizens: Leadership Selection Process
• Media