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FISCAL POLICY: Use of the federal government's powers of spending and taxation to stabilize the business cycle. If the economy is mired in a recession, then the appropriate fiscal policy is to increase spending or reduce taxes--termed expansionary policy. During periods of high inflation, the opposite actions are needed--contractionary policy. The consequences of fiscal policy are typically observed in terms of the federal deficit.

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PUBLIC CHOICE:

The study of collective decisions made by groups of individuals, especially those decisions made by government organizations. As the name suggests, public choice is primarily the study of how choices (decisions) are made by the public (government) sector. Such choices are made, in principle, on behalf of the public or all members of society, to correct market failures or imperfections in the private sector. However, in that the world is imperfect on all fronts, the government sector also comes up short in many cases, with inefficient imperfections due to election seeking politicians, ignorant and abstaining voters, special interest groups, and government bureaucracies.
Public choice is the economic study of joint decisions such as those typically made by voters, government agencies, and political leaders. It is based on the application of standard utility-maximizing behavior to decision making in the political arena. People not only maximize utility when buying products, but also when voting in elections. Politicians maximize utility when running for office. Government workers maximize utility when implementing government policies. The pursuit of individual satisfaction, as such, often conflicts with the general well-being of society.

The study of public choice highlights the errors in government decision making. Many of the problems arise from the voting process. Logrolling, the voting paradox, and the influence of special interest groups indicate that the public's true preferences are not necessarily represented in the government arena. If not, even a well-intentioned government cannot implement actions that address these preferences.

The Study of Collection Choices

Governments -- state, local, and federal -- are the institutions used by society to regulate and control the economy. Governments (the public sector) set the rules of the game. In principle, governments are charged with remedying imperfections and inefficiencies that occur through private sector (household and business) market exchanges and decision-making. That is, people generally look to the public sector to fix problems.

Governments, as such, are intertwined with all sorts of resource allocation decisions. And with all of the resource allocation decisions made by the multitude of government organizations, mistakes are bound to happen. the result is a "two-edged sword." The government sector is charged with correcting imperfections, but can cause other imperfections in the process.

Governments, though, are collections of people, members of society who jointly make decisions. The study of how and why these joint government decisions cause inefficiencies is the study of public choice. More specifically public choice is the study of collective decisions made by groups of individuals, especially those decisions made by government organizations. Public choice is the study of how choices (decisions) are made by the public (government) sector. Such choices are, in principle, made on behalf of the public or all of society. However, the study of public choice indicates that this is not always the case. In fact, inefficiency commonly arises in the government sector when choices are made only for the benefit a small segment of society, including only for the benefit of the decision makers.

The Why of Government

Governments that comprise the government or public sector set and enforce the "rules of the game" for society and the economy. Whereas households consume and businesses produce, governments regulate. All levels of government -- state, local, and federal -- impose resource allocation decisions on other parts of society and the economy (the private sector) that would not be undertaken otherwise. The government sector forces people to pay taxes; it forces businesses to abide by regulations.

The existence of government is due in no small part to five functions that are best undertaken by an entity with the coercive powers of government.

  • Common Defense: This includes maintaining a military and purchasing whatever privately produced goods (clothing, vehicles, paper clips) are needed to accomplish this task.

  • Education: Governments are also heavily engaged in education, from public schools to higher education to job training programs to public service announcements.

  • Transportation: The distribution of goods and services relies on air, water, and land transportation system, much of which is supported in one form or another by governments. Governments are also involved in the transportation of information (telephone, Internet, entertainment broadcasting) and energy (electricity, natural gas).

  • Public Health and Safety: Governments further defend society from inside forces, that is, police and fire protection, disease control, and environmental quality.

  • Legal and Judicial System: Governments establish and enforce the "rules of the game" for society, rules that make it easier for members to produce, consume, and exchange.

  • Money: Lastly, governments play a key role in maintaining the value and stability of the money supply, which facilitates market exchanges.

Market Failures

The government sector commonly undertakes these key functions because the private sector is imperfect, households and business do not generate a "perfect" or efficient allocation of resources through the use of markets. The resulting market imperfections, or market failures, come in four varieties.
  • Public Good: A public good is a good that can be consumed simultaneously by a large number of people without the consumption by one imposing an opportunity cost on others. This is the primary reason for many government functions, especially common defense and public health.

  • Market Control: Market control arises when buyers or sellers are able to exert influence over the price of a good and/or the quantity exchanged.

  • Externality: An externality exists if the market price does not include all benefits and costs of producing, consuming, and exchanging a good.

  • Imperfection Information: The lack of information among buyers or sellers often means that the market price does not fully reflect all benefits or opportunity costs of producing, consuming, and exchanging a good.
With each of these failures, market exchanges do not achieve an efficient allocation of resources indicated by an equality between the value of goods produced and the value of goods not produced. Often the inequality is indicated by an inequality between the demand price and supply price in a market, as with market control. In other cases the inequality results because markets are not even available to exchange goods, such as the public goods of common defense or public health. In still other cases markets do not fully capture the value of goods produce and not produced in the demand and supply prices, seen with externalities and imperfect information.

Government Failures

In principle, market failures can be corrected only through some sort of government action. However, government intervention does not guarantee a solution nor an efficient allocation of resources. The reason is that the government sector also fails. The public sector has its own set of failures.

The study of public choice is all about the failures of government. These government failures are largely revealed with the application of standard utility-maximizing behavior, found in the microeconomic study of markets, to decision-making in the political arena.

  • Politicians: Utility-maximizing leaders might be more concerned with being elected than with pursuing policies that are in the best interest of the entire economy. This is illustrated by the principal-agent problem.

  • Voters: Some utility-maximizing people might choose to remain ignorant and uninvolved, which means their preferences are not necessarily considered by leaders. This results due to rational ignorance and rational abstention.

  • Interest Groups: Other utility-maximizing people choose to be more informed and involved, which means their preferences are often disproportionally influential in the political process.

  • Bureaucracies: Utility-maximizing government employees do not necessarily implement the mandates of government leaders effectively and efficiently.

Voting Problems

A key source of public sector inefficiency rests with the voting process.
  • Median Voter: This voting principle, one that is well known by politicians, is that the median voter determines the outcome of an election. The median voter is the one with an equal number of voters on either side of the vote. As such, the vote cast by THE median voter is the deciding vote. However, this median voter's preference might not generate the best, that is, efficient, result.

  • Voting Paradox: While the preferences of individuals is what we call transitive and consistent, the preferences of voters might not be consistent. That is, as a group, voters might prefer candidate A to candidate B and candidate B to candidate C, but then prefer candidate C to candidate A. This is not only paradoxical and confusing, it also can be inefficient.

  • Logrolling: This is the process in which voters, especially legislative representatives, trade votes to ensure the passage of two separate issues neither one of which would receive a majority on its own. This is commonly done in legislative bodies. It's also something that can lead to an inefficient use of resources.

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Recommended Citation:

PUBLIC CHOICE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 10, 2018].


Check Out These Related Terms...

     | government failures | voting problems | voting rules | median voter principle | logrolling | voting paradox |


Or For A Little Background...

     | market failures | government functions | public finance | efficiency | public sector | private sector | utility maximization | market efficiency | fifth rule of imperfection |


And For Further Study...

     | rational ignorance | rational abstention | principal-agent problem | capture theory of regulation | rent seeking | Tiebout hypothesis |


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