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Chapter 28 Public Choice and Government Failure
The basic economic problem is scarcity. Human wants are unlimited. Resources are limited. The
basic goal in dealing with the problem of scarcity is to produce as much consumer satisfaction as
possible with the limited resources available. In the U.S. economy, this goal is pursued primarily
through private markets.
Private markets operate through the individual decision making of consumers and producers. We
saw in Chapter 3 that private markets generally produce the optimal quantity of output (where
marginal social benefit equals marginal social cost). We saw in Chapters 22 and 23 that a lack of
perfect competition can lead to economic inefficiency. We saw in Chapter 27 that other sources of
market failure can occur (externalities, public goods, common goods, asymmetric information). In
these cases of market failure, government action may result in a more efficient outcome.
Example 1: We saw in Chapter 27 that government action (e.g. taxes and subsidies) can
improve economic efficiency when externalities occur.
Government action is also necessary to establish the legal environment that allows private
markets to operate. For private markets to operate, private property rights must be established
and protected. Government action is necessary to provide national defense, police protection, the
judicial system, etc., in order that private property rights may be established and protected. The
government may also act outside these areas of obvious need. Many production and distribution
decisions in the U.S. economy are made on a collective basis in the public sector (by
government). Public choice theory applies economic principles to public sector decision making.
Government action may result in a more efficient allocation of resources (e.g. by solving a market
failure). But government action also may result in a less efficient allocation of resources.
Government failure – occurs when government action results in a less efficient allocation of
resources.
This chapter examines public choice theory and the sources of government failure. Participants in
the public sector decision making process include voters, candidates for public office, elected
officials, special-interest groups, and government bureaus. What will motivate the various
participants in the public sector? The primary motivation of participants in the public sector is
assumed to be the same as the primary motivation in the private sector; self-interest.
Voters
In the public sector, voters are similar to consumers in the private sector. Consumers vote (with
their dollars) for the goods and services that they want. Voters vote for the political policies that
they favor. However, consumers in the private sector can usually express their desires much
more specifically than voters can. A consumer can purchase exactly the utility-maximizing
combination of goods affordable with that consumer’s income.
Voters cannot vote for the exact political policies that they favor. A voter can only express his or
her preference from the available candidates or other political choices (e.g. a bond issue vote).
Even then, the voter will not receive his or her preference unless the majority of voters agree with
that preference. Thus, people are likely to be more satisfied with the choices that they can make
as consumers than with the choices that they can make as voters.
Example 2: When Lynda goes to Mazzio’s she can order the exact pizza that she wants, maybe
thin crust with black olives and mushrooms. But when Lynda steps into a voting booth, she
usually can choose between only two candidates, neither of whom may be her idea of the perfect
candidate. Lynda is likely to be more satisfied with the choices she can make as a consumer than
with the choices she can make as a voter. What if Mazzio’s offered only two choices in pizza,
maybe sausage with onions or pepperoni with green peppers? Would Lynda be as happy with
either of those choices as she would be if she could pick exactly what she wanted?
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28 - 1 Public Choice and Government Failure