in this video we'll discuss some ideas from an area of economics called public choice which applies economic analysis to the government after all the government is composed of people and we know that people respond to incentives and if the government can be swayed to do something that benefits a handful of people or companies at the expense of everyone else there are enormous profits to be made from trying that kind of behavior is called rent seeking attempts by individuals and firms to use government action to benefit themselves at the expense of others rents in this case is used in the economic sense of profits in excess of the competitive market a great example is the attempts by taxi commissions in many cities to keep ride share operators out using regulations and the law to limit their competition allowing them to increase prices and market share special interest legislation is introduced by lawmakers at the request of the group that stands to benefit so what's in it for the lawmakers sometimes it's true corruption taking bribes in exchange for passing the law but much more often it's campaign contributions to help re-elect the lawmaker with the implicit threat that the special interest will support his or her opponent otherwise but it can also just be that the special interest has a huge incentive to fight for the legislation that helps them so they meet with the lawmaker and make their case but why doesn't the lawmaker hear from the other side why don't voters get together and elect legislators who won't listen to special interests there's a simple economic force at play namely the policy that the special interest wants to see past usually has concentrated benefits to them but defuse costs to voters and consumers a great example is the sugar quota which greatly limits importing foreign sugar thus increasing prices in the united states these higher prices hurt consumers but it works out to just over ten dollars per person per year no one is going to march on washington over 10 bucks that's the diffuse costs they're not very easy to see they're small built into prices and spread out over a large number of people but a very small number of firms control the supply of american sugar and they profit greatly by having legal limits on their competition that's the concentrated benefits 10 bucks per person times 350 million people so that's a lot of money why don't people know more about it this is sometimes called rational ignorance it's not worth most people's effort to become informed about sugar quotas or many other policies because each one of those policies doesn't hurt them very much and it takes time and effort to get informed the opportunity cost is too high for it to be worthwhile but for sugar producers the benefits of being informed and influential in congress are really high when benefits are concentrated and costs are diffused resources can be wasted on projects with low benefits and high costs so often government officials being humans fall prey to the knowledge problem that we've discussed before the one that the nobel laureate friedrich fa hayek laid out information is decentralized suppose i run a coffee shop i have a pretty good idea of how much coffee i need how much i need to pay my workers and what kind of drinks my customers want and i know that mostly through trial and error a central planner or a committee of planners can't ever possibly have all the information necessary to make decisions about how much coffee at my shop should cost or how many shops should be allowed or which fancy pants coffee drinks shops should offer to make their customers happy hayek called this the fatal conceit of policy makers the idea that they understand enough about people's motivations their alternatives and their reactions to grasp the outcomes of these policies so often there are unintended consequences one of my favorite examples from history is from 19th century india which was under british rule at the time there was a cobra infestation in delhi and the british colonial government issued a bounty on cobras if you brought in a dead cobra they paid you so what happened people responded to their incentives and started farming cobras when the british realized what was happening they ended the program and people released their now worthless farmed cobras into the city making the problem worse than it had ever been as hayek once said the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design and that's why economists are so often party poopers because we're the grown-ups in the room that tell policy makers they can't have it all i don't mean to suggest that there's no role for government there absolutely is as we've discussed over and over again but regulations are costly and those costs need to be weighed against their benefits and understanding that the government the people who are a part of it make decisions guided by their own incentives is crucial for understanding that even well-meaning policies might falter and why seemingly obviously bad policies can persist