Government Failures
or
Why Unlimited Government is Bad
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Public Choice Economics
Apply what we know about human behavior in
the private sector to the public sector.
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How We Think Government Works
Problem: Some workers don’t earn a living wage.
Agent
Goal
Action
Voter
To help all people earn a
living wage
Votes for politicians who
support living wage
Politician
To do what is in the best
interests of society
Designs and votes for living
wage laws
Bureaucrat
To serve the public
Executes living wage laws for
good of the poor
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How Government Actually Works
Problem: Some workers don’t earn a living wage.
Agent
Goal
Action
Voter
To maximize own happiness
Become informed and vote if
the expected benefit exceeds
the cost
Politician
To maximize own happiness
Attract over 50% of voters
Bureaucrat
To maximize own happiness
Craft the job to satisfy
bureaucrat’s needs
Lobbyist
Maximize profit from lobbying
Encourage politician to vote
for policies that benefit
lobbyist’s constituency
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But, democracy guards against selfish behavior.
Vote in better people!
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Voter Behavior in a Democracy
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Voter Behavior in a Democracy
Group A
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Group B
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Voter Behavior in a Democracy
Group A
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Group B
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Voter Behavior in a Democracy
Group A
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Group B
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Voter Behavior in a Democracy
•
Who wants to vote?
•
What is the outcome?
•
Is society better off?
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Voter Behavior in a Democracy
Information and voting cost = $20
•
Who wants to vote?
•
What is the outcome?
•
Is society better off?
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Voter Behavior in a Democracy
Concentrated Benefit & Dispersed Cost
Benefit split among a few voters. Cost split
among many voters.
Rational Ignorance
Incentive to remain ignorant of and disengaged
from the voting process.
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But we’re a republic, not a democracy!
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Voter Behavior in a Republic
People elect representatives.
Representatives’ jobs are to be informed and
engaged.
Group A
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Group B
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How to assign representatives?
Divide households evenly into 5 districts
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Fair Representation
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60%
60%
40%
40%
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Fair Representation
3 Districts
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2 Districts
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Representation Biased Toward Majority
5 Districts
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0 Districts
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Representation Biased Toward Minority
2 Districts
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3 Districts
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Voter Behavior in a Republic
Gerrymandering
It is possible to assign representatives to give:
• no representation to the minority, or
• majority representation to the minority.
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Voter Behavior: Conclusion
In a democracy
• Voting results in worse outcomes for society
In a republic
• Voting results in worse outcomes for society
• Gerrymandering can silence minority or give
majority power to minority
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Politician Behavior
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Politician Behavior
Politician’s goal: Get elected
Low
Medium
High
Voter Preferences for a Government Service
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Politician Behavior
Low
Medium
High
Voter Preferences for a Government Service
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Politician Behavior
Median voter theorem
Majority voting yields the median voter’s
preference, even if it is a minority preference.
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Politician Behavior: Conclusion
Politicians don’t seek the common good.
They seek to get elected.
Strategy: Satisfy the median voter.
(even if the median voter is in the minority)
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Bureaucrat Behavior
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Bureaucrat Behavior
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Bureaucrat Behavior
www.dmv.state.pa.us
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Bureaucrat Behavior: Conclusion
No Profit Motive
Bureaucracies evolve to satisfy the bureaucrats’
needs.
Government is a monopoly
People believe that poor service is “natural.”
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Does this mean that government can’t
make good decisions?
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Government vs. Market Decision-Making
Wrong question: Which will make errors,
government or markets?
 Both are composed of fallible humans.
Right question: Which has the incentive to identify
and correct errors more quickly?
 Profit and loss are the incentives.
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Political Incentives
vs.
Profit/loss Incentives
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Education
Public primary and secondary schools
Annual cost per student: $11,500
15.2 students per teacher
Private primary and secondary schools
Annual cost per student: $8,900
12.3 students per teacher
Source: National Center for Education Statistics and National Catholic Educational Association (figures are for 2012)
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Mass Transit
Amtrak
Sunset Limited (Los Angeles to Orlando)
• $35 million annual loss
• serves 81,000 passengers annually
Loss = $432 per passenger
Sources: Amtrak Audit Report OIG-A-2014-001, 10/31/13; US Department of Transportation, Report on the Analysis of Cost
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Savings on Amtrak’s Long-Distance Services, 2005.
Mass Transit
Amtrak
Sunset Limited (Los Angeles to Orlando)
• $35 million annual loss
• serves 81,000 passengers annually
Source: Orbitz, 2015.
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Mail Delivery
US Postal Service
Annual loss: $3 billion
FedEx
Annual profit: $1 billion
UPS
Annual profit: $4 billion
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Business: Health Insurance
Medicare
Annual loss: $500 billion
Projected loss over next 30 years: $100 trillion
Blue Cross Blue Shield
Annual profit: $400 million
Kaiser Permanente
Annual profit: $600 million
Aetna
Annual profit: $1.5 billion
United Healthcare
Annual profit: $120 million
Humana
Annual profit: $2 billion
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But profit is bad!
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Profit
How did this guy…
Because these people…
…liked these…
…get 80 million of these?
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…better than these.
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Profit
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Plunder
Because these people…
How did this company…
…forced these people…
…get 1.3 billion of these?
…to hand them over.
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Plunder
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Conclusion
Quest for profit in the face of
competition causes markets to
identify and correct errors.
Government failures prevent
government from identifying
and correcting errors.
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Moral: Be careful what you wish for…
Rational ignorance
Median voter
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Gerrymandering
Bureaucratic monopoly
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…it’s not what you’ll get.
Rational ignorance
Median voter
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Gerrymandering
Bureaucratic monopoly
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Government Failures
or
Why Unlimited Government is Bad
www.antonydavies.org
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