Major Actors in a Liberal Democracy
Voters express preferences through elections
Special interest groups provide additional information and advocacy for lawmaking
Politicians create laws reflecting voter and interest gorup preferences
Bureaucrats implement laws according to goals set by politicians
Special Interest Groups in a Liberal Democracy
Special interest groups: any group of individuals that value a common cause
SIGs as economic agents:
Choose: < a candidate to support >
In order to maximize: < utility >
Subject to: < budget >
Interest Group Pluralism
Enormous variety of interest groups: business industries, environmental groups, religious groups, taxpayers, government agencies, etc.
Pluralism: a wide distribution of many groups with different viewpoints on any given issue (or priorities across issues)
Interest Group Pluralism
Democracy as a grand bargain between varying interest groups on issues
Role of politicians as leaders to mediate these groups
The Logic of Collective Action
But power and influence is not evenly distributed across interest groups
Olsonian logic: Smaller and more homogenous groups face lower collective action costs of organizing than larger and more heterogeneous groups
Smaller groups to whom benefit (cost) of a policy is more concentrated can outmobilize larger groups where benefit (cost) is more dispersed
The Logic of Collective Action
- Policies in representative democracies tend to feature concentrated benefits and dispersed costs
An Example
"In fiscal year (FY) 2013, Americans consumed 12 million tons of refined sugar, with the average price for raw sugar 6 cents per pound higher than the average world price. That means, based on 24 billion pounds of refined sugar use at a 6-cents-per-pound U.S. premium, Americans paid an unnecessary $1.4 billion extra for sugar. That is equivalent to more than $310,000 per sugar farm in the United States"
Source: Heritage Foundation
An Example
An Example
An Example
"Washington, D.C., doesn't have many farms, or farmers. Yet thousands of residents in and around the nation's capital receive millions of dollars every year in federal farm subsidies...lawyers, lobbyists and at least one psychologist collected nearly $342,000 in taxpayer farm subsidies between 2008 and 2011...[also] Gerald Cassidy, the founder of one of Washington's most powerful lobbying firms, Cassidy & Associates; Charlie Stenholm, a former congressman; and Chuck Grassley, a Republican senator from Iowa; [and former] Secretary of Agriculture Tom Vilsack..."
An Example
And yet, each individual pays maybe $1-2 a year in higher prices for sugar
Difficult to mobilize voters to petition to end the sugar subsidy to save $1
Sugar producers stand to lose a billion dollars
Sugar PACs that contribute thousands to key lawmakers
Rent-Seeking
Think of an economic rent as a "prize," the payment a person receives for a good above its opportunity cost
Creating rents creates competition for the rents, causing people to invest resources in rent-seeking
The cost of the rent is not just the rent itself, but the resources invested in rent-seeking!
Government Intervention Creates Rents I
- Political authorities intervene in markets in various ways that benefit some groups at the expense of everyone else
- subsidies to groups (often producers)
- regulation of industries
- tariffs, quotas, and special exemptions from these
- tax breaks and loopholes
- conferring monopoly and other privileges
Government Intervention Creates Rents I
These interventions create economic rents for their beneficiaries by reducing competition
This is a transfer of wealth from consumers/taxpayers to politically-favored groups
The promise of earning a rent breeds competition over the rents (rent-seeking)
Market Power
Consider a market with some simplified cost assumptions
If this was a competitive market, firms would set p=MC(q) and produce 8
- Consumer surplus maximized
Market Power
A monopolist faces the entire market demand and sets (qm,pm):
- Sets MR(q) = MC(q) at 4
- Raises price to maximum consumers are WTP (Demand): $6
Restricts output and raises price, compared to competitive market
Earns monopoly profits (p>AC)
Loss of consumer surplus
Market Power
- Deadweight loss of surplus destroyed from lost gains from trade
- Consumers willing to buy more than 4 units for lower prices!
- Monopolist willing to accept lower prices to sell more, but would earn less total profits this way
Market Power from Rent-Seeking
- The monopoly profits earned with market power are an economic rent
- This is the "prize" of market power
Rent-Seeking
Gordon Tullock
1922-2014
"The rectangle to the left of the [Deadweight loss] triangle is the income transfer that a successful monopolist can extort from the customers. Surely we should expect that with a prize of this size dangling before our eyes, potential monopolists would be willing to invest large resources in the activity of monopolizing. ... Entrepreneurs should be willing to invest resources in attempts to form a monopoly until the marginal cost equals the properly discounted return," (p.231).
Tullock, Gordon, (1967), "The Welfare Cost of Tariffs, Monopolies, and Theft," Western Economic Journal 5(3): 224-232.
Taxis I
Taxis II
Taxis III
Occupational Licensing I
In 1950, 1 in 20 jobs required a license. Today it's 1 in 4. Source: Obama White House (2015): Occupational Licensing: A Framework for Policymakers
Occupational Licensing II
Occupational Licensing III
Occupational Licensing IV
"'It is illegal in the state of Utah to do any form of extensions without a valid cosmetology license," the e-mail read. "Please delete your ad, or you will be reported.'
To get a license, Jestina would have to spend more than a year in cosmetology school. Tuition would cost $16,000 dollars or more."
Source: NPR Planet Money
Rent-Seeking: Milk
Source: New York Times (Feb 13, 2017)
If You Look at the World Long Enough...
George Stigler
George Stigler
1911-1991
Economics Nobel 1982
Best known for first empirical studies of the effects of regulation, regulatory capture theory
Industrial organization & oligopoly
Also the "founder" of the economics of information
1982 Nobel Prize in Economics "for his seminal studies of industrial structures, function of markets and causes and effects of public regulation"
George Stigler
George Stigler
1911-1991
Economics Nobel 1982
All groups desire to use the State to protect their interests (create a rent)
Direct subsidies boost profits but can induce entry into the industry
- dilutes profits/rents
Control of entry reduces competition and increases rents to incumbents
Olsonian problem: More organized industries fare better in controlling politics than less organized
Stigler, George J, (1971), "The Theory of Economic Regulation," Bell Journal of Economics and Management Science 3:3-21
The Theory of Economic Regulation
George Stigler
1911-1991
Economics Nobel 1982
"[A]s a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits," (p.3).
"[E]very industry or occupation that has enough political power to utilize the state will seek to control entry. In addition, the regulatory policy will ofeten be so fashioned as to retard the rate of growth of new firms," (p.5).
Stigler, George J, (1971), "The Theory of Economic Regulation," Bell Journal of Economics and Management Science 3:3-21
Regulatory Capture
Regulatory capture: a regulatory body is "captured" by the very industry it is tasked with regulating
Industry members use agency to further their own interests
- Incentives for firms to design regulations to harm competitors
- Legislation & regulations written by lobbyists & industry-insiders
Regulatory Capture
Regulatory Capture
The Revolving Door
One major source of capture is the "revolving door" between the public and private sector
Legislators & regulators retire from politics to become highly paid consultants and lobbyists for the industry they had previously "regulated"
Less Sinister Reasons?
A large industrial economy requires complex regulation on very technical issues
- Nuclear physics, pharmacobiology, derivatives pricing, etc
Experts in the industry tend to know the most about these fields
Key resource is information, not necessarily money or influence
Less Sinister Reasons?
Lobbying is an essential part of a modern democracy
- Provide iformation about complex issues
- Conveys relative intensity of preferences of different groups
The socially-optimal amount of lobbying is not 0!
Bruce Yandle
Bruce Yandle
1933-
"What do industry and labor want from the regulators? They want protection from competition, from technological change, and from losses that threaten profits and jobs. A carefully constructed regulation can accomplish all kinds of anticompetitive goals of this sort, while giving the citizenry the impression that the only goal is to serve the public interest," (p.13).
Yandle, Bruce, 1983, "Bootleggers and Baptists: The Education of a Regulatory Economist," Regulation
Baptists and Bootleggers
Regulations are often supported by two categories of groups:
"Baptists": group that supports the ostensible public-interest purpose of the regulation
"Bootleggers": group that supports the regulation because it generates rents for them
Bootleggers often adopt the language of Baptists
Baptists and Bootleggers?
