Q1.#1-What is Public Choice?

A school of thought that the state within the economy will make a choice with which it wil try to maximize economic benefit while lowering costs.

 Intersection of economics and politics. Choices that are primarily interested in mechanisms by which we make political choices and choices made by public officials

  the use of modern economic tools to study problems that traditionally are in the province of political science.

1.Methodological Individualism- Individual choices determine an outcome and assumes that people are rational self interested actors. Any person in any structure has free will

2.Homo Economicus- People act rationally and have omniscience of all implications.Actors are rational and have self-interest which results in a disconnection between political actors/individual actors of the public.

3. Neo Classical Economics-People have a preference and its insignificant where this prefrence comes form

- When the government isent always looking out for consumer welfare in the decisions they make, therefore they fail to maximize consumer welfare.occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention

1-Monopolies, because bureaucrats exploit their monopoly position to inflate their own budget.

2-Government policy interventions like bailouts, because rendering government intervention is counter-productive.

 - Its predicted by PCT because government failure occured when economists assumed elected officials would act for the public interest but instead acted out of self-interest which created inefficient policies that spread out against the individuals unnoticed.

1.People are not perfectly rational

2.People are not exclusively self interested

1. A PC tenant is that people will act rationally and in their own self-interest, so logically a group would do the same.

 2. Given the above, why wouldnt a group act in self-interest under PC tenants, therefore groups can be expected to form with a self-interest.

3. Net of action needs a positive expected benefit(value) It should outweigh the positive. Its a PC tenant because it induces rational action.

- When someone benefits from a public good without paying for it. It is non-exclusive & non-rival. Once provided, everyone benefits.

- Plays a role because we all have the incentive to free ride in non-rival goods and this makes it harder for groups to form solely for the purpose of securing a public good.

- It can be overcomed by selective benefits, an offer to join a group, and one might think the benefits outweigh the costs for that individual and as a result everyone benefits

Coercion is used to diminish the free-rider problem by setting forth a negative consequence of not joining a group. Government uses coercion by putting people in jail that dont pay their taxes and its collective action because its paying for the public good. Labor unions also uses coercion to force people to join.

Example - The unions held the power to coerce employers and the act allowed closed shop, the rule was enforced and said that non-union members may not work in a given workplace.

 North says that more groups are created than Olson accounts for, that Olson doesnt take into account group ideology & willingess to participate in collective action. Even is joining group was irrational, their ideology would lean them to join the group, which accounts for group formation

Hindmoor criticizes Olson's assumption that people are self-interested, he cannot explain humanitarian groups like Greenpeace or any group that act in the interest of others.

- Excess return of the resource owner's opportunity costs. Difference between current profit compared to the next best use of your time. ( can be negative/positive )

- Positive rents are not purely financial gains because they incluse the amount of time and cost invested in rent seeking (lobbying) Rents can be public & private.

Public Rent- trought State and are profits solely made through political process: Property rights, licenses, regulation,tariffs, industrial policy, green policy.If the market is not funding the industry, the government will.

Private Rent- Tend to be shortlived, as one company monopolizes a product, other companies are drawn into the industry which increases competition leading to a decrease in prices.

Its the framework for explaining observed behavior of political actors. Theyre fake because theyre not procuded by market forces. Involves competition for rents and could lead to negative rents if unsuccessful. People go after or compete for the rents. Entities want to become beneficiaries of the government provided rents. But they provide no useful economic production.

Deadweight loss - Creating a monopoly by the government leaves little room for consumer surplus which transfers to the monopolist, and some part is lost and doesn’t go to the monopoly or consumer. Also when companies compete for rents, the money they use for lobbying while rent seeking goes into the dead weight loss “dissipation of rents”

Campaign contributions, or lobbying. Spending money to prepare porposals submitted to a government, "bribes"

Professions that require licensing and limit the number of people that could work in that field. Creating a monopoly require the creation of a licensing regulatory agency.

1.Capture Theory - regulation was never meant to help the public interest, therefore the intent of regulation is solely rent seeking. Regulatory agencies are welcome by industries because eventually industries capture the regulation to create rents. Regulation is a form of interest group arbitration beacuse the ultimate winner is an interest group.

2. Public Interest Theory -  government wants to maximize consumer welfare. We ask the government to intervene when there is market failure and this should maximize consumer welfare. (opposite of capture theory) since collective action is costly.

3. Economic Theory of Regulation -  regulation is one mechanism government can use to make rents which causes rentseeking, which leads to rent extraction. (Supply and demand) Regulation creates winners and losers, and it benefits the winners. Regulation gives more room for politicians and beurecrats to give their own objectives into effect.

money for nothing.politicians threaten to put more regulations on companies and these companies pay them not to do so.

He states that its what specifies and enforces property rights but the existence of the state is essential for economic growth and since the state is man made thats also the source of economic decline.

1- Uses it to explain 2 aspects of economic history: The tendency of of state to produce inefficient property rights which fails to achieve a sustained economic growth and the inherent instability of all states.

2- North's state model as a wealth maximizer of society has 3 characteritics:

a. state trade service (protection,justice)

b. state acts like a discriminating monopolis(devising sets of property rights for different grouos to maximize tax revenue)

c. state is constrained by opportunity cost of its constituents

3- Two main objectives of state services: To specify fundamental rules of competition & cooperation that provide a structure of property rights and reduce transactions costs in order for maximum society output which therefore increases state tax revenue.

Because ideology makes overcoming the free-rider problem possible.

Institutions follow ideologies,therefore differing idealogies form due to different locales of persons which create different occupations. Successful ideologies must be flexible enough to capture new loyalties and maintain old loyalties when external conditions change. We need a theory of ideology because the neo classical theory of large group action is too limited to catch other elements in people's decision-making process.

1st - Is marked by a shift from primitive man(hunter-gatherers) to settled agriculturalists. A shift from common property rights caused by outside conditions (population growith & diminishing resources) to more exclusive property rights which made them a favorable adaptation for survival. Scarce resources like big game, made bands be more exclusive in sharing them which then made owners have a desire to increase efficiency in agriculture.

2nd - North believed the industrial revolution was a gradual transition. The speed of applying new technology lagged behind the actual discovery of this technology. Failure to develop property rights in this period caused the lagging effect. Britain established a patent law system which raised private return closer to social rate of return which gave conditions to foster significant innovations. With specialized production came the increasing transactions costs of measuring inputs/outputs. It improved quality and lowered the cost of devising new techniques.

They have means and motives to inflate the budgets. Government failure happened becase of miscommunication and their self-interests which lead to the failure of supply & demand.

Niskanen - The public sector breaucracies supply an output up to twice that of competitve industry faced by the same demand & cost due to beauracrats maximizing their budgets.

Private Sector - The outputs are easier to measure in the private sector than in the public sector. Private is about profit maximization.

  Public Sector - Is about producing something at the lowest possible cost given a budget. In terms of risk-sharing, any salary is not dependent on what it is or how much it is that person produces. The principal and the agent have more misaligned goals than in the private sector. Its hard to determine supply in public sector because of the absence of price signals that you get in the private sector.

A P/A relationship is when a person (principal) contracts an agent to undertake taks on their behalf. Principals usually have incomplete information or dont know whether the agents are acting in the way they would want them to act. Agents will not necessarily act in their principals interests unless induced to do so, they have conflicting interests in pursuing their own policy preference.

Information being passed between junior and senior beauracrats is designed to reach to top of the pyramid and then make a decision which is sent down. But the pressure for those on top is such that little useful information is passed down on to them before a decision is made. This makes beraucracies extremely inefficient.

Posner - Economic regulation is determined by supply & demand of industry, interest groups, and consumers. Court are more insolated from political control than industries. Socialization of power buffers the courts away from influence where as the bureaucrats have much influence. Believes bureaucrats are like private employees in corporations because they have incentives to work just as hard not to get fired.

Hindmoor - Says that bureaucrats are self interested actors who attempt to maximize their discretionary budget, public reputation, and power. The ease of making changes and managing the bureaucracy are not related to the size of the budget. Bureaucrats try to maximize their budget rather than inflate it because politicians tell them to take it or leave it, so they maximize it rather than mess with it and get fired.