Lecture Notes: Public Voice in Economics

Introduction

• Public voice applies economic analysis to government.
• People in government respond to incentives.

Key Concepts

Rent Seeking

• Definition: Attempts by individuals/firms to use government action for self-benefit at others' expense.
• Rents: Economic profits beyond competitive market levels.
• Example: Taxi commissions limiting rideshare competition.

Special Interest Legislation

• Introduced by lawmakers for groups that benefit.
• Lawmakers' incentives:
  • Corruption (bribes).
  • Campaign contributions (implicit threats from special interests).
  • Strong case presented by special interests.

Economics of Special Interest

• Concentrated Benefits, Diffuse Costs
  • Example: US sugar quota increases consumer prices slightly but offers huge benefits to a few firms.
  • Rational ignorance: Consumers not informed due to small personal cost.

Waste of Resources and Knowledge Problem

• Projects with low benefits/high costs can occur due to misaligned incentives.
• Hayek's Knowledge Problem:
  • Information is decentralized.
  • Central planners can't know everything needed for effective decision-making.
  • Example: Cobra bounty in 19th century India.

Hayek's Fatal Conceit

• Policymakers overestimate their understanding of people’s motivations and reactions.
• Unintended consequences often arise in policy-making.

Role of Government

• Government has a role but regulations are costly and should be weighed against their benefits.
• Decision-making by government is guided by personal incentives.
• Understanding these dynamics helps comprehend why policies, even bad ones, may persist.

Conclusion

• Economists often highlight limitations in policy-making.
• Importance of considering incentives and potential unintended outcomes in designing policies.