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14CH-MICROECONOMICS-AMACHER

Section 14.1 

Introduction

Imagine for a moment that you are the chief administrator of a small public transport system that has just received approval from its board of directors for a significant enlargement of its mission. The difficulty you face is that growth requires significant physical expansion: You need to build buildings. In order to build these buildings, you have to sell bonds to finance the construction. And in order to sell these bonds, the citizens in your area must vote to tax themselves in order to fund the expansion. You are well aware that tax increases can be challenging to pass, for obvious reasons. Is there anything you can do, besides the normal advertising and explaining of how important this expansion will be, that will increase your chance of success?

In 2017 the California State Senate voted to send a $4.45 billion transportation plan to voters for their approval. The catch? The plan would be funded by increasing bridge tolls throughout the state, some by as much as $3 per trip. A trip from the East Bay into San Francisco would now be as high as $9 for a single crossing. Why would California residents ever vote in favor of this proposal?

This chapter will examine possible strategies and the effect of economic incentives on governmental policy decisions.

14.1 Public Choice

Public choice theory is a relatively new area of study in economics. A useful definition appeared in the 1993 annual report of the Center for the Study of Public Choice at George Mason University:

Choice is the act of selecting from alternatives. Public refers to people. But people do not choose. Choices are made by individuals, and these may be private or public. A person makes private choices as he goes about his ordinary business of living. He makes public choices when he selects among the alternatives for others as well as for himself. (p. 28)

Public choice theory is not as optimistic as traditional welfare economics about the potential for government intervention to improve market outcomes. The weaknesses of the political process mean that government intervention does not work in the ideal way suggested by welfare economists. Public choice analysis thus begins with the assumption that people who act in a self-interested way when making personal economic decisions are the same people who vote, run for office, or are employed in the bureaucracy. For example, public choice economists expect the voter to be ill informed because the cost of informed voting is extremely high. They view the politician as a vote maximizer, putting coalitions together to attract a majority of voters. Bureaucrats are not profit maximizers but seek instead to maximize budgets and/or to ensure the stability of their jobs. According to the public choice economist, the result of such self-interested behavior in the public sector is that government is an imperfect intervener in its attempt to correct for market failures. One of the most important insights

Rent SeekingSection 14.2 

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