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Economics gives us insight as to how
humans behave when our unlimited desires
collide with our limited abilities.
These insights enable us to predict how
car buyers will alter their behavior when
gas prices rise, how students will alter
their behavior when the government
subsidizes college loans, and how
cigarette manufacturers will alter their
behavior when the government
regulates vaping.
>> Public choice is a field of economics
that takes what we understand about human
behavior and applies that knowledge to
humans who behave in the public sector,
politicians, bureaucrats,
lobbyists, and voters.
But because the humans who
occupy the public sector are not
different from those who
occupy the private sector,
we can use economic principles to
predict how these humans will behave.
>> For example, voters have less
incentive to engage in the voting process
when the benefits of getting their way
in the voting booth are small, but
the cost of casting a vote is large.
This can lead to people voting for
policies that are bad for society.
>> Suppose 100 people are asked
to vote on a proposed law.
The law says that the government will
tax 90 of these people $10 each,
burn half of what's collected and give
what's left to the remaining 10 people.
If we allow these people to vote on
the law, what will be the outcome?
The 90 who would be taxed don't like
the law and will vote against it,
the 10 however stand to gain $45 each,
they like the law and will vote for it.
The proposal will be defeated
by a vote of 90 to 10.
>> But now,
suppose that it is costly to vote,
it is costly just to stay aware of
the laws that the government is proposing.
It is costly to read the laws,
it is costly to understand how
the laws will affect you, and
it is costly to physically get up, go to a
polling station, vote, and come back home.
In our thought experiment,
we can simulate this voting cost by
charging each person $15 to vote.
It doesn't matter how you vote, yes or no,
but to vote at all, you have to pay $15.
Who will want to vote?
The 10 people will definitely want
to vote, if this law is passed,
each will gain $45, that more
than covers the $15 cost to vote.
What about the 90?
They won't vote, the law is clearly bad
for them, but the cost of living with
the bad law is less than the cost
of voting against the law.
So the 90 will all stay home.
The law will pass by a vote of 10 to 0,
and society will be worse off.
>> This is called the principle of
concentrated benefits and dispersed costs.
The law represents a cost to society, one
group of people will pay $900 in taxes.
The law also represents
a benefit to society,
another group of people will receive $450.
The cost to society is greater than
the benefit to society, and so
society would be better off
if the law were defeated.
But it isn't defeated, why?
Because the $450 benefit is shared
by a small group of people,
so each person in the small group has
a strong incentive to vote for the law.
But the $900 cost is spread over
a large number of people, so
each person in the large group has a
lesser incentive to vote against the law.
And if the incentive to vote against
the law is less than the cost of
voting against the law, those against
the law won't bother to vote.
>> The principle of concentrated benefits
and dispersed cost can create a strong
incentive for people to vote for
laws that actually are bad for society.
This is just one example of how public
choice economics can help us to understand
better the behavior of
people in the public sector.
In the same way that economics
helps us to understand and
predict the behaviors of consumers and
producers in the private sector,
it also helps us to understand and predict
the behaviors of voters, politicians, and
bureaucrats in the public sector.
>> And the better we understand how
humans behave, the better able we
are to appreciate the appropriate role of
government in a society of individuals
made interdependent through
the relationships we call the economy.
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