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Public Choice and Rent Seeking

Prior to beginning work on this discussion, read Tim Worstall’s article,

One Benefit of Nancy MacLean’s Democracy in Chains – Public Choice and Rent Seeking Popularised (Links to an external site.)

Based on the article’s information and Chapter 14 in your textbook, especially Sections 14.1 and 14.2, respond to the following:

What is the public choice idea or theory?
Explain what rent seeking is.
How can you combine the ideas of public choice and rent seeking?
Choose one real-world example of combining public choice and rent seeking to evaluate.

Your initial post should be a minimum of 300 words.

14 Public Choice and Government Failure

i-Stockr/iStock/Thinkstock

Learning Outcomes

After reading this chapter, you should be able to

• Examine the implications of self-interested behavior in the public sector (public choice) as a cause of gov-
ernment failure.

• Describe the concept of rent seeking.

• Explain why government grows in terms of logrolling and bureaucratic incentives and why regulation cre-
ates a bias against new products and new technology.

• Explain some of the methods of privatization.

298

Section 14.1 Public Choice

Introduction
Imagine for a moment that you are the chief administrator of a small public transport system
that has just received approval from its board of directors for a significant enlargement of its
mission. The difficulty you face is that growth requires significant physical expansion: You
need to build buildings. In order to build these buildings, you have to sell bonds to finance the
construction. And in order to sell these bonds, the citizens in your area must vote to tax them-
selves in order to fund the expansion. You are well aware that tax increases can be challenging
to pass, for obvious reasons. Is there anything you can do, besides the normal advertising and
explaining of how important this expansion will be, that will increase your chance of success?

In 2017 the California State Senate voted to send a $4.45 billion transportation plan to voters
for their approval. The catch? The plan would be funded by increasing bridge tolls throughout
the state, some by as much as $3 per trip. A trip from the East Bay into San Francisco would
now be as high as $9 for a single crossing. Why would California residents ever vote in favor
of this proposal?

This chapter will examine possible strategies and the effect of economic incentives on govern-
mental policy decisions.

14.1 Public Choice
Public choice theory is a relatively new area of study in economics. A useful definition
appeared in the 1993 annual report of the Center for the Study of Public Choice at George
Mason University:

Choice is the act of selecting from alternatives. Public refers to people. But
people do not choose. Choices are made by individuals, and these may be pri-
vate or public. A person makes private choices as he goes about his ordinary
business of living. He makes public choices when he selects among the alter-
natives for others as well as for himself. (p. 28)

Public choice theory is not as optimistic as traditional welfare economics about the potential
for government intervention to improve market outcomes. The weaknesses of the political
process mean that government intervention does not work in the ideal way suggested by
welfare economists. Public choice analysis thus begins with the assumption that people who
act in a self-interested way when making personal economic decisions are the same people
who vote, run for office, or are employed in the bureaucracy. For example, public choice econ-
omists expect the voter to be ill informed because the cost of informed voting is extremely
high. They view the politician as a vote maximizer, putting coalitions together to attract a
majority of voters. Bureaucrats are not profit maximizers but seek instead to maximize bud-
gets and/or to ensure the stability of their jobs. According to the public choice economist, the
result of such self-interested behavior in the public sector is that government is an imperfect
intervener in its attempt to correct for market failures. One of the most important insights

299

Section 14.2 Rent Seeking

that emerges from public choice theory is that small
groups with strong interests will often get their way
politically because it is irrational (unprofitable) for
the majority to oppose them.

When considering what it will take to convince a
majority of voters to approve a particular proposal,
it is helpful to identify the primary biases that vot-
ers tend to exhibit in the process. Understanding
voter behavior provides some insight into why there
could be less-than-optimal intervention in the mar-
ket. For example, proposals with long-delayed ben-
efits are likely to be adopted only if their costs are
unknown or can be deferred or concealed, whereas
proposals offering readily apparent short-term ben-
efits and deferred costs stand a good chance of win-
ning voter approval. Proposals to abolish programs

or reduce public spending have a low probability of adoption. Electoral rewards go to politi-
cians who propose new programs or expansions and extensions of existing programs. Finally,
packages of reform proposals stand a better chance of adoption than individual reform pro-
posals, even if none of the packages’ components would be accepted by a majority of voters if
considered separately (Mitchell, 1978).

Policy problems exist because two imperfect mechanisms are at work. The market fails
because of externalities, underproduction of public goods, and business cycles. The collective
political process fails because the participants are responding to individual incentives. Policy
makers must, therefore, choose between two imperfect mechanisms in attempting to solve
any policy problem. The policy maker and voter must examine the biases inherent in both the
market solution and the collective political solution. It will not always be clear that the cost of
intervention is less than the cost of inactivity. Therefore, the public choice approach may lead
to a prescription of no intervention in many cases, on the grounds that the cure in this case
could be worse than the disease.

14.2 Rent Seeking
Economic rent is the economic return over opportunity cost. Rent seeking is the commit-
ment of scarce resources to capture returns created artificially. For example, imagine that
Iowa farmers want to receive higher prices for their corn. A political candidate could cam-
paign to expand the use of corn-based ethanol energy. Ethanol is not an efficient producer
of energy, but expanding its use would push out the demand for corn and increase prices
(and short-run profits) for Iowa farmers. Thus, Iowa farmers would be rent seeking against
the rest of the public by using political power to get an economic benefit, to the detriment of
other, more beneficial, resource use. This rent seeking is a real cost to society because com-
petition for governmentally created rents, unlike the “real” rents discussed earlier, does not
generate increased supply.

Hill Street Studios/Blend Images/Superstock
Public choice analysis begins with the
assumption that people who act in a
self-interested way when making per-
sonal economic decisions are the same
people who vote, run for office, or are
employed in the bureaucracy.

300

Section 14.2 Rent Seeking

The Cost of Rent Seeking
Gordon Tullock (1967), in attempting to measure the costs of rent seeking, was the first to
develop the concept. As you learned in Chapter 10, the deadweight loss of monopoly results
from the firm producing a less-than-efficient quantity of output. However, Tullock argued that
many of the economic rents, or profits earned by the firm, are also wasted in the process. The
cost of rent seeking, or the spending to capture these profits, turns them into a social cost
of monopoly. In fact, if competition for the monopoly were vigorous, the monopolist profits
could be exactly equal to the resources wasted in competition for the monopoly privilege. The
“cost of capture” is unproductive in the sense that it uses scarce resources but does not gener-
ate any economic activity that lowers price or increases output.

Legislation and Rent Seeking
Tullock’s concept of rent seeking helps explain government action as a form of self-interested
behavior by politicians and voters. Many actions of people in government can be explained by
this analysis. In fact, it might be argued that an industry of rent seekers exists in most state
capitals, and most certainly in Washington, D.C.

There are at least two broad applications of this rent-seeking theory to government actions.
The first explains the types of government regulation. George Stigler (1971) described the
benefits and costs to various interest groups of using the government as a vehicle to increase
their own wealth. Some groups, such as agricultural interests, seek income transfers from the
state. Other groups, such as Airbnb, use politics to fend off regulation that would regularly
apply to all lodging accommodations but would have a negative impact on Airbnb’s costs and
profit. In some cases, management and labor join together to use the state for their mutual
benefit at a cost to consumers, such as in attempts to restrict imports like steel.

The second application focuses on the economic behavior of legislatures. In this analysis, the
politician is responsible for brokering transfers from one group to another. One can view the
politician as an entrepreneur putting together coalitions of rent-seeking groups. Consider
the public provision of education as an example. In the United States education through the
12th grade is mainly produced in the public sector. A public choice economist would argue
that even if education is a public good, there is no reason to believe that representative
democracy can create the incentives necessary to internalize the external benefits of edu-
cation. Instead, officeholders broker benefits to certain subsets of the population, includ-
ing members of the educational administration and organized student or parent groups.
So what started as a correction of market failure may end up in a solution that is quite far
removed from the optimal correction.

301

Section 14.3 Analysis of the Political Market

14.3 Analysis of the Political Market
According to the self-interest theory of government, the size of government increases due to
rent-seeking activity and brokering activity by politicians. There are also other forces at work
to influence the type of governmental programs that are created by politicians. Most of these
forces tend to increase the size of government.

The Median Voter Theorem
The median voter theorem predicts that under majority rule, politicians will adopt the posi-
tions of voters near the center of the political spectrum. To see why, refer to Figure 14.1.
Assume that political preferences in society are continuous from left to right and distributed
under the normal curve in the figure. If there are two candidates, R and L, who are at equal
distances from the center, they will get the number of votes represented by the area under the
curve on their side of the median line. They tie at the polls. Candidate R will realize that he can
steal some votes by moving toward the median, because he can count on all the voters to his
right. Candidate L will realize what is happening, and she will also move toward the center in
an attempt to get a majority of the votes cast. As a result, both politicians will end up near the
median political position, where there are the same number of voters to the left and the right.

Figure 14.1: The median voter model

If two politicians are running against one another, they will both move toward the median position to
capture votes.

Number
of voters

Median
political
position

Left Right

L R

The median voter theorem can be used to explain why public spending is aimed at groups
in the middle of the political stream, especially in a two-party system. Why, for example, do
politicians promote programs to spend more money on education in general than they do for
education for poor children?

302

Section 14.3 Analysis of the Political Market

Logrolling
When many issues are before a legislative body at the same time, the outcome most pre-
ferred by voters on some issues may not result. This failure is due to politicians trading favors,
sometimes referred to as “logrolling.” Logrolling is a form of exchange in which politicians
trade support on one issue for support on another issue. If a legislator logrolls, he or she
trades votes on one bill or act in order to secure votes for another bill or act. It is the direct
exchange of support. The senator from Oklahoma votes for the military base in South Carolina
in exchange for a vote by the senator from South Carolina for the water project that will make
Tulsa a seaport.

The combination of geographically based representative democracy and logrolling promotes
overspending. This excess spending results because citizens see the cost of their local proj-
ects being shifted to citizens of other states or districts and reward their elected officials for
delivering such projects. Since most representatives attempt to be successful at this political
game, logrolling creates larger-than-desired levels of government spending.

Policy Focus: Why Are Voter Turnouts So Low?

When election time rolls around, voters are bombarded with commercials and e-mails
concerning their civic responsibility to vote. These statements are often accompanied by
complaints about low voter turnouts for U.S. elections. You may even be told by your local
newspaper’s editorial writer that “if you don’t vote, you can’t complain.”

But think about it rationally for a minute. What are the costs of voting? You must register to
vote. You must spend time getting to the polls or filling out and mailing an absentee ballot.
Most importantly, you must spend time becoming informed on the issues and the candidates.
What are the benefits of voting? It is possible that you might be able to affect the outcome,
but the probability of your vote being important is tiny, especially in national elections.
Perhaps you vote because you get a feeling that you have done your duty, or you receive
satisfaction from participating in civic affairs. These feelings must be important, or even
fewer people would vote. This is a consumption motivation for voting.

If we really wanted more people to vote, we would need to make it less costly to vote. In
Europe most countries vote on Sundays. Some states make election day a legal holiday to
encourage voting. It’s not clear whether this increases or decreases the cost of voting! If
you don’t think costs affect turnout, answer this question: Do more people vote when the
weather is nice or when it is bad?

How could the cost of voting be lowered or the benefits increased? Some methods are
postcard registration, transportation to the polls, and more voting places so that lines are
shorter. In 2003 Texas introduced what it calls “no excuse voting.” All Texas counties are
required to begin early voting 17 days before an election. Texans can stop in anytime during
this time and cast their vote. Early voting is certainly more convenient, which should greatly
reduce the cost of voting. There was a slight increase in voter turnout in 2004, but the
overall trend since early voting in Texas began has revealed no dramatic increase in voter
turnout. More convenient does not necessarily translate into more voters (Progressive States
Network, n.d.).

(continued)

303

Section 14.3 Analysis of the Political Market

Policy Focus: Why Are Voter Turnouts So Low? (continued)

Regardless of the effectiveness of early voting, more states have adopted the practice in
recent years. Many states have also implemented other changes to the voting process to
make it easier and more convenient for voters to participate. For example, many states have
expanded absentee voting to all voters who request to vote via absentee ballot. Other states
have shifted to all-mail voting, where a ballot is automatically mailed to every eligible voter
without a special request or application. Figure 14.2 shows which states fell into which
category as of 2017.

In spite of increased efforts by some states, voter turnout rates are still very low in the
United States. Although more voters turned out for the November 2016 election than for
the November 2012 election, only about 139 million Americans participated. That’s just
60.2% of the voting-eligible population. Researchers from the group Nonprofit Vote found
that voter participation was most common in so-called battleground states or in states that
allowed voters to register and cast ballots on the same day (Wilson, 2017). Voter turnout
thus appears to be correlated with (a) the likelihood that a vote would be more pivotal, as in
battleground states, or (b) the voting process being unrestricted, as in the case with same-
day registration. Many economists would have predicted this using public choice theory.

Figure 14.2: Early voting options in each state

From “Absentee and early voting,” by National Conference of State Legislatures, 2017, Retrieved from http://www.ncsl.org
/research/elections-and-campaigns/absentee-and-early-voting.aspx. © National Conference of State Legislatures.

MDDE

MT ND

MS AL

WI
MI

MO
KY

NMAZ

OK
AR

NY
OR

CO
KS

AS GU MP PR VI

Early voting Early voting and no-
excuse

absentee

voting

All-mail voting No early voting:
excuse require for

absentee
© 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.

http://www.ncsl.org/research/elections-and-campaigns/absentee-and-early-voting.aspx

304

Section 14.3 Analysis of the Political Market

Bureaucrats and Bureaus
Once a governmental unit has decided how much of a public good to produce and how to pay
for it, the legislature and the executive branch (president, governor, mayor) usually turn the
job of supplying the good over to a bureau—a government agency or department. In a few
cases, governmental units simply purchase privately supplied goods with tax revenue. A clas-
sic case of using private suppliers exists in Scottsdale, Arizona, where part of the fire protec-
tion is privately supplied and part is provided by the local government. Garbage removal is
privately supplied in many communities. Often, however, a bureau is responsible for produc-
tion of a good in the public sector.

The role of bureaus and bureaucracy creates many problems in supplying public goods. It is
extremely difficult, if not impossible, to monitor the efficiency of a bureau. Bureaus do not
usually produce measurable outputs. Instead, they produce services. For example, a bureau
might produce fire protection, education, or defense. When legislatures monitor these activi-
ties, they tend to examine spending rather than measure outputs. Citizens, however, are more
interested in output levels and quality of service. Sometimes there is a partial measure of
output, such as the number of students educated or length of response time for firefighting
units. But how can the value of the output of the U.S. Department of Defense be measured?
The value of output must usually be inferred from the activity of the bureau, and that activity
is most often measured by the level of expenditure. Thus, complaints about the quality and
quantity of education or defense are generally reduced to calls for increased spending on the
activity itself.

Monopoly Problems
The problem of monitoring bureaus is further complicated by the fact that bureaus are almost
always monopoly suppliers dealing with a single purchaser, the government. This relation-
ship makes the monitoring function of the government committee charged with oversight of
the bureau difficult at best. The rationale for a monopoly supplier is that it avoids inefficient
duplication. This reasoning may or may not be valid. However, the monitoring committee has
no competing information by which to judge the bureau’s efficiency.

This point has become a hot topic in debates concerning the public funding of education.
Some leading policy critics suggest a voucher system as a way to introduce competition into
public education. Under a voucher system, each student receives a “ticket” that can be used
for tuition at any school. The hope is that the resulting competition will improve the quality
and quantity of publicly financed education. Teachers as a group are opposed to the voucher
system concept. A voucher system in primary and secondary education would be a lot like
state support of higher education. The state “pays” public colleges and universities based on
their enrollment, and the state colleges and universities compete with each other (and with
private colleges) for students. It isn’t a perfect analogy, but a fairly close one.

Budget Maximizing
Still another problem in monitoring bureaus is created by the way in which bureaucrats are
rewarded. As we discussed in a previous chapter, entrepreneurs or hired managers in the
private sector generally lay claim to any profit and therefore have ample incentive to increase
efficiency. In a public bureau, the manager has no such stake. In fact, it may even be that

305

Section 14.4 Privatization

the bureau manager’s salary is inversely related to efficiency. This perverse situation can
result when salary increases are tied to the size of the budget and the budget grows (in part)
because of inefficiency.

There are many possible goals that bureaucrats substitute for the private manager’s goal
of profit maximization. Among these other motivations are salary, perquisites of the office,
power, public reputation, patronage, bureau output, ease of management, or investment in
future private sector employment. Government officials need to keep these competing moti-
vations in mind when they establish bureaus and when they evaluate bureau managers’
behavior. There is an internal contradiction in expecting a government official to try to con-
trol the size of a bureau.

What Is the Answer?
These problems of government intervention lead to disturbing conclusions. You saw in pre-
vious chapters, especially the one on monopoly, that markets do not always produce ideal
results. The chapter on market failure and government intervention added externalities and
public goods to the list of market failures. But this chapter has shown that political action
designed to correct market failure introduces a whole new set of problems. The net result is
a messy one. Markets may fail, but governments also can fail. Government and government
representatives do not always work in the public interest.

In fact, the conclusion of public choice theory is that there is no such thing as “the public inter-
est.” It is instead correct to say “the self-interest of groups working in the public sector.”

This view of government failure as a parallel to market failure has been widely accepted
among policy makers and voters. The important point is that economists can attempt to iden-
tify market failure and government failure and allow policy makers to sort out the least harm-
ful solution to policy problems that affect everyone.

14.4 Privatization
One policy movement, often referred to as privatization, has worked against the tendency of
governments to grow. Privatization is the transfer of governmental activities and/or assets
to the private sector. In many industrialized countries, including France and the United King-
dom, and also in Latin America, privatization has been the norm for about 30 years. It involves
not only sale of state enterprises to the private sector but also contracting out certain kinds
of public services paid for with taxes to private firms (such as management of prisons and
hospitals). U.S. cities and localities have used five methods to privatize services: contracting,
franchising, vouchers, subsidies, and tax incentives.

The advantages of privatization are that it reduces government spending and is politically
feasible because it does not eliminate the service. Privatization may

1. introduce competition and the resulting efficiencies,
2. enable smaller localities to join together into more efficiently sized units for pur-

chasing services,

306

Section 14.4 Privatization

3. remove government from labor negotiations and retirement commitments, and
4. transfer revenue-consuming activities to private firms that pay taxes and produce

revenues.

Privatization can also result inadvertently from failure of governments to deliver a quality
service. The United Parcel Service’s or FedEx’s success in competing with the U.S. Postal Ser-
vice in delivering packages and overnight mail is perhaps the best example of such a govern-
mental default. Privatization will continue to be an important policy topic for state and local
governments as the United States attempts to reduce its debt.

Check Point: Methods of Privatization

Method Operation Example

Contracting Government bids out activity Taxis and private prisons

Franchising Government grants franchise Garbage pickup

Vouchers Government gives “tickets” and public buys Education

Subsidies Government gives grants Cultural activities

Tax incentives Government grants tax credits Child care

Economics in Action: Private Prisons: How U.S. Corporations
Make Money out of Locking You Up

The United States is home to 5% of the world’s population but a quarter of the world’s
prisoners. It also has the highest rate of youth imprisonment, and on any given day there
are more than 70,000 youths in detention. And who are the biggest winners of this mass
incarceration? The for-profit prison companies, whose business models essentially depend
on locking more and more people up. Get the full story here: https://youtu.be/hQxtRcfBIXY.

Global Outlook: Privatization in Africa

The story of privatization in Africa is an interesting one, primarily because of its ability to
reduce the great financial burden on the government while also potentially stimulating
private economic growth. Until 1996 privatization in Africa had been slow. By 1997 the
number of transactions had increased to roughly 2,900, with a cumulative total sale value of
around $6 billion (White & Bhatia, 1998). In contrast, privatization revenues in Italy alone
generated $112 billion from 1990 to 2001 (Mahboobi, 2002).

In 2005 John Nellis of the Center for Global Development examined the process and
progress of African governments in a movement toward privatization and found that
African states had privatized a far smaller percentage of their state-owned and operated

(continued)
© 2019 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.

307

Section 14.4 Privatization

infrastructure companies than in Latin America or several transition economies. Also, of the
privatization that had taken place, it was in smaller and less valuable industries like low-
end manufacturing, while infrastructure privatization remained stagnant (Nellis, 2005).
Table 14.1, reproduced from Nellis’s study, shows the government’s share of ownership
before and after privatization over 10 years.

(continued)

Table 14.1: Government’s share of equity before and after privatization

Sector Average government’s share of equity Percentage

Manufacturing and industry Before privatization 79.7

After privatization 7.9

Agriculture, agroindustry, and
fisheries

Before privatization 79.5

After privatization 1.6

Services, tourism, and real
estate

Before privatization 70.2

After privatization 14.3

Trade Before privatization 95.3

After privatization 3.3

Transport Before privatization 97.6

After privatization 4.9

Financial Before privatization 86.7

After privatization 8.2

Energy Before privatization 88.3

After privatization 46.5

Water Before privatization 100

After privatization 12.5

Electricity Before privatization 100

After privatization 33

Telecoms Before privatization 95.8

After privatization 42.8

Other Before privatization 63.3

After privatization 10.2

Total average government’s share of equity before privatization 89.1

Total average government’s share of equity after privatization 10.3

“Table 4: Government’s share of equity before and after privatization,” from “Privatization in Africa: What has
happened? What is to be done?,” by J. Nellis for Center for Global Development, 2003, Retrieved from https://www
.cgdev.org/sites/default/files/2765_file_cgd_wp025 . Licensed under CC-BY-NC 4.0.

Global Outlook: Privatization in Africa (continued)

https://www.cgdev.org/sites/default/files/2765_file_cgd_wp025

https://creativecommons.org/licenses/by-nc/4.0/

308

Conclusion

Conclusion
Return to the public bond issue that you are in charge of getting passed. Is there anything
you might do to help your own cause? Considering the California Bay Area transportation
plan, many people would vote in favor of the toll increase because of the expected benefits:
$500 million to help pay for an expanded fleet of new-generation rail cars, expanding rail
transportation to San Jose, and a whopping $1.1 billion for rebuilding interchanges and
improving the most heavily traveled highway corridors. Many residents would be willing
to pay a little more every time they cross a bridge in order to reduce traffic congestion and
improve rail service. However, the cost of the plan will fall predominantly on a specific set
of individuals: people who cross a bridge as part of their daily commute to work, which are
primarily residents of the East Bay (Alameda and Contra Costa Counties). With citizens from
nine Bay Area counties voting on a proposal where the benefits are widespread but the costs
fall primarily on the residents of only two counties, the measure is likely to pass (California
Legislative Information, n.d.).

Another example is the case of Tarrant County Junior College (TCJC) in in Tarrant County,
Texas, which wanted to build an additional campus. It received approval from its govern-
ing board and then had to go to the voters in a bond election to have them approve a tax
increase to pay for the campus. Tax increases are not easy to pass! There are a few people
who will gain from the tax increase. Students who will attend certainly will gain. But most
potential students aren’t even of voting age yet. Faculty and staff will gain. Most of them
haven’t been hired yet. Certainly, there are enlightened businesspeople and citizens who
favor education and will come to the polls and support the bond issue. There are, however,
a lot of people who will lose through higher taxes. They will lose only a little because it is a
very small tax increase and is spread over a very large county.

Global Outlook: Privatization in Africa (continued)

One reason for the lag may be because privatization has not gone smoothly in many regions.
For example, in Zambia, the process of privatization was once referred to as a successful
program by the World Bank. However, public perception became increasingly negative as
allegations of mismanagement and corruption erupted. Resentment has resulted over the
closure of firms previously run by Zambians.

What should be done? African states would need to make sure that their procedures and
methods of privatization are efficient and free of political interference and that contracts are
enforceable. Otherwise, states will be unable to attract and retain the investment necessary
for successful privatization.

One other method may be to envision new types of partnerships between public and
private enterprises. In 2018 the new South African president, Cyril Ramaphosa, spoke to
the country’s 700 state-owned enterprises (SOEs), saying, “We will need to confront the
reality that the challenges at some of our SOEs are structural. SOEs cannot borrow their
way out of their financial difficulties” (as cited in Crabtree, 2018, para. 5). Whether this
means privatization or equity partnerships, genuine reform may still take some time as the
government works to regain the trust of voters that moving toward greater privatization will
benefit them.

309

Conclusion

Therein lies a strategy. Pick a time for the election when the bond issue is the only item on
the ballot. That is exactly what the administration of TCJC did. They could have picked a
special election held in Texas to pick a new U.S. senator. They could have picked a time when
there were city and county elections all over Tarrant County. But they didn’t; they picked a
Saturday in July when the bond issue was the only thing on the ballot. Those people who had
a direct interest in the expansion of TCJC turned out and voted for the bond issue. The larger
group of voters who would have had an interest in the U.S. Senate election and/or had an
interest in the city elections did not go to the polls. They were uninterested or maybe didn’t
even know there was a special bond election.

So you see, voter turnout is a double-edged sword. It depends on whose side you are on.
Sometimes policy makers might be just as happy if some voters stayed home!

Key Ideas

1. Public choice theory identifies biases in the political process and applies economic
analysis to political processes and outcomes.

2. Rent seeking is the economic description of individuals’ use of the political process
to generate income transfers to themselves or to groups they support.

3. The median voter theorem suggests that, under majority rule, politicians will adopt
positions near the middle of the political spectrum. Logrolling in a legislature
increases the size of budgets. Legislators agree to vote for a colleague’s project in
return for a vote on their project. Bureaucratic decision making is different from firm
decision making because bureau managers face a different set of incentives than
private sector managers do. All of this type of behavior tends to increase the size of
government. Government regulation introduces a bias against new products and
new technology.

4. Privatization of government assets or activities permits provision of goods and ser-
vices to be done more efficiently by relying on market (and other) forces.

Critical-Thinking Questions

1. Why do bureaucracies not always serve the public interest?
2. What is public choice theory?
3. Why is it so hard to cut programs once they have started?
4. What is the median voter theorem?
5. According to public choice theory, why is it not rational to vote?
6. How do radical economists challenge the marginal productivity theory of income

distribution?
7. How can logrolling increase the size of government?
8. When could a bureau manager’s salary be inversely related to efficiency? What prob-

lems could this cause?
9. Is it possible for interest groups in Washington to engage in logrolling? How would

they do it?
10. What are a few ways the government could improve voter turnout? Why might this

be a bad idea?

310

Conclusion

11. Should the government intervene in every case in which an externality exists? In
what situations might it be better not to intervene?

12. Why do government programs that concentrate benefits and diffuse costs have a bet-
ter chance of being enacted than those that benefit many and impose costs on a few?

13. Give a few examples of current government entities that could possibly be privatized.
What potential goals would privatization accomplish?

Key Terms
logrolling Vote trading in the legislative
process.

median voter theorem A theory that pre-
dicts that, under majority rule, politicians
will reflect the positions of voters near the
center of the political spectrum.

privatization The transfer of governmental
activities and/or assets to the private sector.

rent seeking The commitment of scarce
resources to capture returns created
artificially.

Opinion

One Benefit of Nancy MacLean’s

Democracy In Chains – Public

Choice And Rent Seeking

Popularised

Aug 6, 2017, 08:46am EDT

Tim Worstall Former Contributor

This article is more than 3 years old.

The classically liberal wing of the economics profession has been rather

blindsided by Nancy MacLean’s recent book, Democracy in Chains. Quite

how anyone could come to believe that the observation that politicians have

economic motives–which is what public choice theory really says, that they

have the same regard to economic self-interest as the rest of us–means that

in fact you’re a racist opposed to the desegregation of schools is difficult to

work out. Still, rather than get into the argument of what the book is really

trying to say I’d just note that what is happening in reaction is that the study

of public choice and of rent seeking is being discussed more avidly than it

has been for a long time.

An example of this is Don Boudreaux talking about his former colleague,

Gordon Tullock:

Economists have long understood that people with
special privileges – say, producers protected from
foreign competition by tariffs – act in ways that
generate outcomes that are less valuable than are
the outcomes that would be generated in the
absence of such privileges. But in 1967 Gordon said,

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The seeking of the rents being a much greater drain on the economy than

the number that actually get captured. This is Babe Ruth’s point all over

again. It’s not the illicit legover that damages the sportsman’s performance,

it’s the chasing around half the night trying to find someone to legover with

which does.

What amuses me at this point is that we can in fact combine the two ideas,

the rent seeking and the public choice idea, and when we do we get a rather

good explanation of how politics works. Rent seeking is the attempt to gain a

legal privilege that then makes you money. Public choice is just saying that

politicians–and bureaucrats–have economic self-interest. Quite obviously

it’s therefore possible for the two to combine and the seekers to pay the

politicians for the privilege.

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But of course our own politicians and bureaucrats would never do that, the

actual taking of bribes is un-American and besides, the FBI’s rather too good

at detecting it. However, it’s worth adding a bit of another bit of economics

here, game theory. If it is of benefit to politicians to be lobbied–which it is,

this is how election campaigns are paid for, from the donations lobbied for–

and it is also of value to rent seekers that privileges be granted, then we

in effect, ‘The costs of those long-understood
inef�ciencies, while real and regrettable, are small
in comparison with the wastes of resources used
when people strive to get such privileges – that is,
to seek rents.’ If, say, U.S. tire producers expect that
their pro�ts will rise by $200 million if Uncle Sam
slaps a punitive tax on Americans who buy non-
American-made tires, these tire producers won’t sit
around twiddling their steel belts hoping that Uncle
Sam will impose such a tariff. These tire producers
will actively seek such a tariff; they’ll lobby for it.

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should see a constant expansion of the regulatory state as politicians can

then farm ever more of the economy for those donations. Further, do not

forget that positive privilege in my favour is not the only way this can work.

It’s also possible for my competitors to be subject to negative privilege–or,

as we might call it, greater regulatory oversight. This would expand that

regulatory state again.

All of which is actually a rather good explanation of what is going on with

the large tech companies these days. A decade back Google and Microsoft

spent near nothing on lobbying DC. No one there really understood them

and they weren’t worried about the politicians. This isn’t the case today of

course, everyone and their grandmother is calling for more regulation. At

which point the companies themselves have to lobby in order to discredit

the more ludicrous ideas. From the point of view of the political caste this is

all just great, isn’t it? More resources flowing, through lobbying, into the

political ecosystem.

Or as we might put it, that combination of rent seeking and public choice

economics leads to threats of the expansion of the regulatory state in order

to attract the lobbying revenues against said expansion. A complete waste of

the time and money of course.

Tim Worstall

I’m a Fellow at the Adam Smith Institute in London, a writer here and there on this and

that and strangely, one of the global experts on the metal scandium, one of the…

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