Archive for the ‘Public Choice’ Category

Ignorant but Rational

March 3, 2010

Don Brash accused the public of being ignorant, and then said that this was caused by “the failure of teachers to teach and politicians to explain some of the basic facts of life.” The claim of ignorance on issues of public policy is certainly correct, but the diagnosis for why this is the case is wrong.

When are people more likely to be ignorant? When the costs of being informed are high, and the benefits of being informed are low. So, being ignorant about how much you earn could end up being very costly – you may accumulate debt, you will poorly assess your preferred consumption bundle, etc. That’s why people tend to know how much they earn.

But what are the costs of ignorance in public policy? Well, the cost of voting for a nonsensical idea is pretty low, because the chance of your vote determining the outcome of the election is tiny. If there’s a one in a million chance of your vote affecting the election, and the cost of tariffs for you personally is $5, then the expected cost to you is one ten thousandth of 5 cents if you vote for a party that supports tariffs. Equally, voting for policies that are illogical may have psychic benefits – you might decide to do something because of personal bias.

But if ignorance and irrationality is driven by our current institutions, then institutional change could alter those incentives. As opposed to each citizen getting to vote, we could have a higher level of aggregation achieved by cross-sectional juries of citizens. We could massively decentralise state functions and then allow greater personal choice in jurisidiction, including the possibility of virtual jurisdictions. An easy first step would be to end get out the vote campaigns.


February 19, 2010

Jesse made reference to the fact that I thought it was harder for the Government to deliver benefits to special interests than many people think, so I thought I would expand on the point.

Let’s consider an example. Let’s say that the beef lobby has sought favours from Government through donations and votes, and the Government wants to help their supporters out. Let’s say they decide to give $500 per hectare to every beef farmer. This will, in fact, not help the beef farmer. After all, before the intervention the return to sheep farmer and beef farmers were about equal (otherwise they would switch business), and so the effect of the subsidy will merelylead to many sheep farmers converting their farm to beef farming. In the process, the return on the actual production on beef will drop – and it will ultimately balance out the benefit. You may get $500 per hectare from the Government, but the return on the sale of beef will drop by $500 per hectare.

Or take another example, which leads to one-off beneficiaries. The restriction on entry into the taxi industry is common around the world. Often, taxi drivers have to purchase medallions from the Government. Initially, this will restrict supply, driving up the prices that taxi drivers can charge. However, as those medallions are exchanged in the market, the higher prices you can charge become capitalised into the value of the taxi medallion. The second generation taxi drivers can charge high prices – but that is compensation for the massive price of the taxi medallion.  So, taxi medallions deliver a one-off gain to current taxi drivers, but no ongoing benefit for taxi drivers.

Generally speaking, the more concentrated benefits will occur in those areas where the Government also limits supply – doctors, lawyers, accountants, etc. That’s why the typical first act of lobbying is for registration or other restrictions on entry. Sometimes these restrictions pose as uniform regulations, the fixed cost of which affects more heavily those who engage least in the industry, and who will be dissuaded from competing.  See here.

This also explains why the Government has a tendency to deliver services rather than goods. Goods can be exchanged easily – recipients can sell them. If you deliver goods in a discriminatory way (i.e., don’t give them to certain races or income groups), there will be an incentive to trade them to those who value them the highest – i.e., those who would have got them in the absence of intervention. However, services are typically non-transferable, and so it provides an effective way for the Government to discriminate.