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Lecture+28 - Announcements HW on ch14 and ch16 Due Monday...

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Announcements HW on ch14 and ch16 Due Monday. Ch 17 is due Thursday. No office hours Monday or Tuesday but I can see you by appointment on Wednesday. We probably won’t get through all these slides today. 1 of 35
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Public Choice The provision of public goods is one of the primary reasons for people to create a government. In a representative democracy (like we have), we elect officials who make decisions for us on issues such as the provision of public goods (and lots of other stuff). We also sometimes vote on things directly (referendums) Let’s think about this process a little. 2 of 35
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Public Choice in Representative Democracy Public choices The Government decides two major things The level of various public goods to provide The amount of taxes collected and how to collect them According to the “Median-voter model,” the preference of the median voter will dominate other choices (so the government should do what the median or “middle” voter wants). Suppose politics is a 1-dimensional spectrum (liberal to conservative). By definition, half are to the right of the median voter and half are to the left. The median is 3
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Rational Ignorance One reason we elect officials is that there is no way we can know about all the stuff that is decided in politics. Due to the large cost of knowledge (and often little benefit), it is rational for us to remain ignorant about most of the little things our politicians do. Unfortunately this opens the doors for special interest groups to influence politicians more than they ought to. (note: this can lead to a “principal-agent” problem) 4 of 35
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Distribution of Benefits and Costs Legislation can be divided into 4 groups based on the distribution of costs and benefits: 1. Widespread benefits; widespread costs Traditional “ public-goods legislation Positive impact on economy Total benefits > total costs 2. Concentrated benefits; widespread costs “Special-interest legislation” Harms the economy Total costs > total benefits Pork-barrel spending 5
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Distribution of Benefits and Costs 1. Widespread benefits; concentrated costs “Populist legislation” Those who pay the cost fight this legislation Those who benefit usually see such little potential benefit that they remain rationally ignorant 2. Concentrated benefits; concentrated costs “Competing-interest legislation Fierce political battles (labor unions vs. employers) 6
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Distribution of Benefits and Costs Categories of legislation based on the distribution of costs and benefits 7
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Rent Seeking Special interest groups spend millions of dollars lobbying government officials for support on issues that benefit the group.
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