Behavioral Economics, Ep. 5: What You Need to Know About Public Choice

Behavioral Economics (playlist): Heuristics, cognitive biases, public choice– oh my! Watch the entire series to learn more about behavioral economics at http://hayekandchill.com/economics/
Econ Chronicles (playlist): Join professor Bryan Caplan as he explains rational ignorance & the most common forms of cognitive biases that voters hold. 
Public Choice (article): A primer on Public Choice theory, its foundational principles, and its implications for institutions. 
Democracy and Political Ignorance (book): Professor Ilya Somin explores the causes and effects of political ignorance, and the challenges it presents to our democracy. 
Economics Made Easy (playlist): Want to learn more about how the economy works? Check out our playlist for videos on immigration, the minimum wage, and much more! 

>> 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.