merged

ureaucratic inefficiency. In the public sector, these restrictions on bureaucratic inefficiency do
not exist. Government bureaus are likely to be very inefficient because:
1. They have no profit motive. A private business firm is generally assumed to pursue profitmaximization.
But a government bureau has no profit motive. With no profit motive, a
government bureau will be motivated to spend all of its funding. To end a budget year with
leftover funding would likely result in decreased funding for the next year. The lack of profit
motive also leads government bureaus to be less concerned about minimizing costs than a
private business firm would be.
2. They have no owner. Private business firms have owners who have an incentive to monitor
the efficiency of the firm. Government bureaus belong to “all the people”. But none of the
people have an owner’s incentive to monitor the efficiency of the bureau. The leaders of the
bureau may be able to manage it to suit their own interests. This is an example of the
principal-agent problem discussed in Chapter 19.
3. They usually face no competition. Private business firms are compelled by competitive
pressure to be responsive to consumer demand. This responsiveness to consumer demand
leads to greater consumer satisfaction. Government bureaus usually face no competition, and
thus do not have to be very responsive to consumer demand. Nor do government bureaus
face competitive pressure to minimize costs of production.
4. They seek to grow. Government bureaucrats are motivated to work for the expansion of their
programs. A government bureau is a special-interest group in favor of its own continued
existence and growth. Thus, once a government bureau is created, it is politically difficult to
eliminate or even to shrink the bureau.
The inefficiency of government bureaus can lead to government failure.
Other Sources of Government Failure
Government failure occurs when government action results in a less efficient allocation of
resources. Some of the sources of government failure have already been discussed in this
chapter: (1) voter flaws, (2) candidates’ pursuit of the median voter, (3) short run focus of elected
officials, (4) special-interest group influence, and (5) government bureau inefficiency.
There are other sources of government failure:
1. Difficulty in measuring the marginal social benefit and the marginal social cost of
government spending. In a private market, marginal social benefit is measurable (by the
price that consumers are willing and able to pay) and marginal social cost is measurable (by
the marginal cost of production to producers). In a competitive private market, equilibrium will
tend to occur where price and marginal cost are equal, and thus where marginal social benefit
and marginal social cost are equal. This is the economically efficient quantity of output. But
with government spending, benefits and costs usually have to be estimated by government
officials. The government officials preparing the estimates often have a self-interest in overestimating
the benefits and under-estimating the costs of government spending. Thus,
government spending will tend to be inefficiently large (where marginal social cost exceeds
marginal social benefit).
Example 9: Boston’s Central Artery/Tunnel, also known as “The Big Dig”, was originally
estimated to cost $2.8 billion. The actual cost of the project turned out to be nearly $15 billion.
The project also took over 5 years longer than projected.
2. Taxes collected do not reflect the full cost of a government program. Two types of costs
are incurred when the government collects taxes and uses resources to provide goods and
services:
a. The opportunity cost of the resources used. If the government buys resources in the
market, the price paid indicates the opportunity cost. If the government does not pay the
market price (e.g. drafts personnel for the military), the opportunity cost may be much
higher than the price paid by the government for the resources.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Public Choice and Government Failure 28 - 6