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 dont 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

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 legislators
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

Does

races

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

profit-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
bureaucrats 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

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

9-18

The Public Sector Bargaining

Process
Bureaus

output and budget are

determined simultaneously
Bureau

makes all-or-nothing sale

Bureaus

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 Inter-government comparison

PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy

Randall Holcombe

9-22