PUBLIC CHOICE
THEORY OF
GOVERNMENT
INTERVENTION
1
MODELS OF GOVERNMENT
Despotic benovelent government model
The fiscal exchange model
The fiscal transfer model
The levitahan model
2
Political exploatation of majority voting
rule
Town Council Rankings For Bond Fund
First Choice
Second Choice
Third Choice
Groucho
Police
Tourism
Bridge
Harpo
Bridge
Police
Tourism
Tourism
Bridge
Police
Voter
Chico
Voting Cycle
•
Tourism vs Police
•
•
Police vs Bridge
•
•
Winner = Bridge
Bridge vs Tourism
•
•
Winner = Police
Winner = Tourism
Continuous cycle (no equilibrium) or arbitrary
winner depending on order
BUREAUCRATIC EMPIRE BUILDING
5
CATEGORIZING INEFFICIENCY
X-inefficiency
It is argued that a bureaucracy has less incentive to cut
costs because it doesn't face competition from
other organizations. Therefore the AC curve is
higher than it should be.
Allocative inefficiency
A monopoly is allocatively inefficient because in
monopoly the price is greater than MC. P > MC. In
a competitive market the price would be lower and
more consumers would benefit
6
Monopoly
Costs / Revenue
MC
£7.00
AC
Monopoly
Profit
This(D)
AR
Given
isthe
both
curve
barriers
the
forshort
a to
monopolist
entry,
run and
likely
the
long
monopolist
run
to be
equilibrium
relatively
will be
position
price
able to
inelastic.
exploit
for
a monopoly
abnormal
Output assumed
profits in the
to
be atrun
long
profit
as maximising
entry to the output
(note caution
market
is restricted.
here – not all
monopolists may aim
for profit maximisation!)
£3.00
MR
Q1
AR
Output / Sales
Monopoly
Welfare
implications of
monopolies
Costs / Revenue
MC
£7
AC
Loss of consumer
surplus
£3
AR
MR
Q2
The higher price and lower
The monopoly
price
in a that
competitive
priceconsumer
would be
output
means
market
£7
per
unit
would
with
be
output
£3
with
levels
A
look
back
at
the
diagram
forby
surplus is reduced, indicated
output
lower
atlevels
Q2.
at Q1.
perfect
competition
will reveal
the
grey
shaded
area.
that in equilibrium, price will be
On the face of it, consumers
equal to the MC of production.
face higher prices and less
choice
monopoly
conditions
We
caninlook
therefore
at a
compared toofmore
competitive
comparison
the differences
environments.
between
price and output in a
competitive situation compared
to a monopoly.
Q1
Output / Sales
Monopoly
Welfare
implications of
monopolies
Costs / Revenue
MC
£7
AC
Gain in producer
surplus
The monopolist will benefit
be
affected
from
additional
by a loss
producer
of producer
surplus equal
showntobythe
thegrey
grey
triangle rectangle.
shaded
but……..
£3
AR
MR
Q2
Q1
Output / Sales
Monopoly
Welfare
implications of
monopolies
Costs / Revenue
MC
£7
AC
The value of the grey shaded
triangle represents the total
welfare loss to society –
sometimes referred to as
the ‘deadweight welfare loss’.
£3
AR
MR
Q2
Q1
Output / Sales
SCOPE FOR DISCRETIONARY
BEHAVIOUR BY BUREAUCRATS
Asymmetric information
Asymmetric tay liability
Asymmetric consumption benefits
Asymmetric voting paterns
11