ECON 2 Lecture Notes - Lecture 30: Rent-Seeking, Business Cycle, Productive Efficiency
Jeff Koo
Econ 2
Principles of Economics
Spring 2019
4 Units
Government’s Role and Government Failure
Government Failure
Government Failure: inefficient resource allocation due to problems in the operation of the
public sector
● Principle Agent Problems: arise when tasks are delegated by one group of people
(principals) to another group of people (agents)
o Conflicts arise because the interests of the agents may not be the same as the
interests of the principals, so that the agents may end up taking actions that are
opposed by the principals whom they are supposed to be representing
● Special Interest Effect: any outcome of the political process where a small number of
people obtain a government program or policy that gives them large gains at the expense
of a much greater number of persons who individually suffer small losses
o Politicians feel they will lose the campaign contributions and votes of the small
interest group that backs the issue if they legislate against it but will not lose the
support of the large group of uninformed voters
o Pork Barrel Politics: a means of securing a government project that yields benefits
mainly to a single political district and its political representative
● Rent-Seeking Behaviour: appeal to government for special benefits at taxpayers’ or
someone else’s expense
o Term rent in rent seeking is used to refer to any payment in excess of the
minimum amount that would be needed to keep a resource employed in its current
use
o Those involved in rent seeking are attempting to use government influence to get
themselves into a situation where they will get paid more for providing a good or
service than the minimum amount you would actually have to pay them
o Examples: tax breaks, tariffs, subsidies
● Clear Benefits, Hidden Costs:
o Politicians favour programs that have immediate and clear-cut benefits and vague
or deferred costs, such biases may lead politicians to reject economically
justifiable programs and to accept programs that are economically irrational
● Limited and Bundled Choice:
o Limited number of candidates to choose from so voters are offered bundled
choice in terms of policy
o Ex: the candidate who comes closest to voter Smith’s preferences may endorse
tobacco farmers but Smith will overlook that due to other benefits
● Unfunded Liabilities:
o Created by government when it commits to making a series of future expenditures
without simultaneously committing to collect enough tax revenues to pay for
those expenditures
Document Summary
Government failure: inefficient resource allocation due to problems in the operation of the public sector. Clear benefits, hidden costs: politicians favour programs that have immediate and clear-cut benefits and vague or deferred costs, such biases may lead politicians to reject economically justifiable programs and to accept programs that are economically irrational. Unfunded liabilities: created by government when it commits to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures. Chronic budget deficits: run by government runs one whenever its tax revenues are less than its spending during a particular year. Debt crises: government unable to borrow any money due to already large debt, most likely will be forced to undertake some combination of drastic spending cuts or massive tax increases. Fiscal policy: attempts to use changes in tax rates and spending levels to offset the business cycle.
