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CONFIRMING PAGES

PART EIGHT
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Microeconomics of Government
lower costs and higher profit. The higher profit not only benevolent government that responds with precision and
benefits the firm’s owners but enhances the promotion efficiency to the wants of its citizens. The market system
prospects of managers. Moreover, part of the managers’ pay of the private sector is far from perfectly efficient, and
may be tied to profit via profit-sharing plans, bonuses, and government’s economic function is mainly to correct that
stock options. There is no similar gain to government agen- system’s shortcomings. But the public sector too is subject
cies and their managers—no counterpart to profit—to cre- to deficiencies in fulfilling its economic function. “The
ate a strong incentive to achieve efficiency. relevant comparison is not between perfect markets and
The market system imposes a very obvious test of per- imperfect governments, nor between faulty markets and
formance on private firms: the test of profit and loss. An ef- all-knowing, rational, benevolent governments, but be-
1
ficient firm is profitable and therefore successful; it survives, tween inevitably imperfect institutions.”
prospers, and grows. An inefficient firm is unprofitable and Because the market system and public agencies are
unsuccessful; it declines and in time goes out of business. both imperfect, it is sometimes difficult to determine
But there is no similar, clear-cut test with which to assess the whether a particular activity can be performed with greater
efficiency or inefficiency of public agencies. How can any- success in the private sector or in the public sector. It is
one determine whether a public hydroelectricity provider, a easy to reach agreement on opposite extremes: National
state university, a local fire department, the Department of defense must lie with the public sector, while computer
Agriculture, or the Bureau of Indian Affairs is operating production can best be accomplished by the private sector.
efficiently? But what about health insurance? Parks and recreation ar-
Cynics even argue that a public agency that ineffi- eas? Fire protection? Garbage collection? Housing? Edu-
ciently uses its resources is likely to survive and grow! In cation? It is hard to assess every good or service and to say
the private sector, inefficiency and monetary loss lead to absolutely that it should be assigned to either the public
the abandonment of certain activities or products or even sector or the private sector. Evidence: All the goods and
firms. But the government, they say, does not like to aban- services just mentioned are provided in part by both private
don activities in which it has failed. Some suggest that the enterprises and public agencies.
typical response of the government to a program’s failure
is to increase its budget and staff. This means that public
sector inefficiency just continues on a larger scale. QUICK REVIEW 29.1
Furthermore, economists assert that government em- • Majority voting can produce voting outcomes that are
ployees, together with the special-interest groups they serve, inefficient; projects having greater total benefits than total
often gain sufficient political clout to block attempts to pare costs may be defeated, and projects having greater total costs
down or eliminate their agencies. Politicians who attempt to than total benefits may be approved.
reduce the size of huge Federal bureaucracies such as those • The paradox of voting occurs when voting by majority rule
relating to agriculture, education, health and welfare, and na- does not provide a consistent ranking of society’s preferences
tional defense incur sizable political risk because bureaucrats for public goods and services.
and special-interest groups will team up to defeat them. • The median-voter model suggests that under majority rule
and consistent voting preferences, the voter who has the
Finally, critics point out that government bureaucrats middle preference will determine the outcome of an election.
tend to justify their continued employment by looking for • Government failure allegedly occurs as a result of rent
and eventually finding new problems to solve. It is not seeking, pressure by special-interest groups, shortsighted
surprising that social “problems,” as defined by govern- political behavior, limited and bundled choices, and
ment, persist or even expand. bureaucratic inefficiency.
The Last Word at the end of this chapter highlights
several recent media-reported examples of the special-
interest effect, the problem of limited and bundled choices,
and problems of government bureaucracy. You might want Apportioning the Tax Burden
to read through these examples now, relating each to the We now turn from the difficulties of making collective de-
section just completed. cisions about public goods to the difficulties of deciding
how those goods should be financed.
Imperfect Institutions
It is possible to argue that such criticisms of public sector
inefficiency are exaggerated and cynical. Perhaps they are. 1 Otto Eckstein, Public Finance, 3d ed. (Englewood Cliffs, N.J.: Prentice-
Nevertheless, they do tend to shatter the concept of a Hall, 1973), p. 17.

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