POLICY ANALYSIS BY DAVID L. WEIMER AND AIDAN R. VINING (2005)
CHAPTER 2
In regards to policy analysis, the product of it may be as simple as passing a
bill and receiving its intended consequence, or it may be more involved.
Policy analysis may come in the form of advice but not all advice may be
viewed as policy analysis according to Weimer and Vining



Prerequisites
o The advice must relate to public decisions
o Must be informed of social values
The majority Policy analysts are found in
o Government
o Non-profit organizations
Complex and Simple definitions pg.24
o Client-oriented advice relevant to public decisions and
informed by social values

Other definitions
 A means of synthesizing information including
research results to produce a format for policy
decisions and for determining future needs for
policy relevant information
 An applied social science discipline which uses
multiple methods of inquiry and argument to
produce and transform policy-relevant information

o Why have another definition when there are so many others
to consider
 Helps develop a practical approach and conceptual
foundations that allow us to become effective producers
and consumers of policy analysis
 It also emphasizes social values in the context of policy
analysis
Policy Analysis and Related Professions
 Academic social science research, policy research, classical
planning, “old” public administration, journalism
 Academic Research
o Objective in the field is the development of theories that
contribute to a better understanding of society
 Which is done by developing rigorous methods for
specifying theories and empirically testing the
hypotheses derived from those theories
 Policy Research

o Whereas academic research directs its attention to
relationships in regards to a broad range of variables…
o P.R. Focuses on the relationships between variables that
reflect social problems and other variables that may be
manipulated by public policy
Classical Planning
o Involves the specification of goals and objectives that lead to
the development of a better society
o And how to achieve them

Public Administration pg. 24
o Old and New
o Old P.A. advocated the separation of administration from
politics which is evident by the quote from President Woodrow
Wilson: “…administration lies outside the proper sphere of
politics”
o New P.A.
 Abandons the idea of separation and seeks to influence
the adoption as well as implementation of policies pg 24

Journalism
o Might seem like a strange comparison initially; but J is a
medium that may be used to introduce policy problems to the
general public which they may view as being relevant to them
or not
o Similarities w/ J and Policy analysts
 Tight deadlines
 Similar strategies related to gathering information
 Effective Communication
Policy analysis as a profession
 Pre 1980’s many did not identify themselves as policy analysts and
viewed themselves as either economists, planners, program
evaluators, budget analysts, etc.
 Post 1980’s Recently, the policy analyst as a profession has proved
as an established profession
o Where are they?
 They can be found in a myriad of organizational settings
such as:
Within Fed. Govt: the Natl Sec. Council, Office of
management and Budget (OMB), Congressional
Budget Office (CBO), Congressional Research
Service (CRS), General Accounting Office (GAO)
 They can also be found in the private sector:
 trade associations, labor unions, and non-profit
corporations
o Ultimately, policy analysts work for their clients and
their analysis must be useful to their client.

o If they wish to be rehired, their results must be found
desirable and useful to the party who contracted their
services
 Consultant who “pander to the prejudices” of the
client are coined as “hired guns” or “beltway
bandits”
 Those that are best able to resist biasing their
analysis in favor of the client often have large
clientele, provide specialized skills, or are viewed
as reputable
Basic Preparation for Policy Analysis
 Prep in 5 areas is essential to be a policy analyst
o Analysts must know how to gather, organize, and
communicate information in a relevant and useful
manner
o Analysts need a perspective for putting perceived social
problems in context
o A. need technical skills to enable them to better predict
and confidently evaluate the consequences of policy
o A. must have an understanding of political organization
behavior in order to predict and maybe influence the
adoption and implementation of policies
o A. should have an ethical framework in which they
must adhere to, due to their client-based relationships.
The ethical dilemma is an issue that will be further addressed in the
following chapter.
Policy Analysis: Concepts and Practices
David L. Weimer and Aidan R. Vining
PSC 723/EPS 710
Chapter 3 Overview
“Toward Professional Ethics”
Chapter Three discussed the underlying sense of ethics and morality a professional policy analyst
must utilize when providing advice and recommendations to their client. This sense of morality
in one’s work actually mirrors the personal sense of ethics one has. Much of the ethical
challenges actually arise from the fact that a policy analyst rarely, if ever, provides information
in a vacuum. In essence, there are many “cooks” in the policy kitchen and therefore there will be
many divergent points of view and opinion that impact what recommendations are actually put
into place. Conflict is often the source of ethical dilemma. This chapter focused upon
professional ethics rather than the comparative merits of substantive policies, laying a framework
for thinking about the ethical responsibilities of the professional policy analyst.
Key Points:
Decision making rests upon the “relative weight we give to the value of efficiency (getting the
greatest aggregate good from available resources) and equity (fairness in the way it is
distributed.)
Three Important Values Regarding Conduct
1) Analytical Integrity
2) Responsibility to Client
3) Adherence to One’s Personal Conception of the Good Society
Three Roles of the Analyst
1) Objective Technician (the process is important, quantifiable)
2) Client Advocate (loyalty, confidentiality, shared world view)
3) Issue Advocate (focus on policy outcomes, issue-oriented, i.e. the environment or
abortion rights)
The effective analyst keeps all three roles under consideration. Ethical problems involve how
much of each value can be sacrificed when conflict arises. The author believes the most serious
ethical conflicts arise when the analyst’s responsibility to the client collides with the analyst’s
personal values.
Factors complicating ethical judgment include status of current/future employment; continued
access to the policy issue; personal trust of the client; and the analyst’s reputation.
There are options for the analyst when the demands of their clients conflict with their sense of
analytical integrity or their conception of the good society. These are broadly defined as:
1) Voice (working to make change from within)
2) Exit (leave the organization or job)
3) Disloyalty (undercut the political position or policy preference of the client)
These three can be combined to result in one of seven outcomes:
1) Protest (Voice)
2) Resign (Exit)
3)
4)
5)
6)
7)
Sabotage (Disloyalty)
Issue Ultimatum (Voice & Exit)
Leak (Voice and Disloyalty)
Resign and Disclose (Exit & Disloyalty)
Speak out until silenced (Voice, Disloyalty and Exit)
The extreme reactions involving any manner of disloyalty such as “whistle-blowing” and
sabotage must be carefully considered and should only be done when all other reasonable options
have failed. There must be an extremely compelling reason to do either. The author considers
these “morally suspect” and emphasizes either requires a high level of justification.
Examples of Value Conflicts are:
(1) Demand for “cooked” results
(2) Misrepresentation of results
There is not a developed code of ethics that has been agreed upon and sanctioned by the
Association for Public Policy Analysis and Management. The author believes that developing a
consensus is too difficult at this time due to the “great diversity of its members and the
organizational contexts in which they work.” I disagree. If the profession desires a code of
ethics, then it’s just a matter of generating the will to create such a code.
Some suggested guidelines that deserve consideration include:
1) Policy scientist should not work for clients who they believe have goals that
contradict the basic values of democracy and human rights
2) Resignation rather than contribute to the realization of goals with which they
fundamentally disagree
3) Clients deserve complete honesty
4) Analysts should not use their access to information and influence with clients to
further their own private interests
Policy Analysis: Concepts and Practices
By David L. Weimer and Aidan R. Vining
Chapter 3
Toward Professional Ethics
 The objective is to sketch a framework about the ethical responsibilities of the
professional policy analyst.
o This is done by focusing on the relationship between analysts and clients and the
different environments in which they interact.
Analytical Roles
 Through policy analysis we face conflicts between competing values. If the greater good
would benefit the majority of people but result in serious negative effects on a small
number of people, should it still be done?
 The values that are most important for a policy analyst:
o Analytical integrity
o Responsibility to the client
o Adherence to one’s personal conception of the good society.
 There are three appropriate roles the analyst can play, and each one will use one of the
above mentioned values as its main criteria to behave ethically and the other two become
secondary.
o Objective Technician
 The analysis is the most important. It should be fair and unbiased.
o Client’s Advocate – most loyal to the client
 These analysts feel that the client is most important.
 Choose clients whose views are similar to their own.
 The vagueness in analysis can be used to further the cause of the client.
o Issue Advocate
 They place great importance on issues
 They see the clients as a way to further their cause/issue
 They feel the analysis is vague.
 The analyst should try to include a mix of the three types of roles.
Value Conflicts
 Conflict can occur when one has to choose between the loyalty to the client and the
loyalty to ones own values.
 What can an analyst do when they are faced with this dilemma? (45)
o Book by Albert Hirschman: Ideas of exit and voice
o Weimer and Vining add another tool, disloyalty.
 Seven different ways the analyst can express their conflicting values
o Protest - voice one’s opinion
o Resign – exit
o Sabotage - disloyal
o Issuing an ultimatum – combines voice and exit. Threaten to quit unless action is
taken
o Leak – using voice and disloyalty
o Resign and disclose – exit and disloyalty
o Speak out until silenced – combines all three: voice, exit, and disloyalty.
 Occasionally the client will take the information provided by the analysts and change it to
suit their own needs. They could also ask the analyst to change the results to better suit
the interests of the client. (49)
o If the analyst is asked to change the results of the research:
 It depends on which role the analyst has chosen.

The client’s advocate would be comfortable with changing the
results since their loyalty lies with the client

The issue advocate would also go along with the client because it
would benefit their cause.

However, the objective technician would not want to go against the
results of the research. His/her loyalty lies with the analysis, not
the client’s interests.
o If the client changes the results to better suit his/her needs:
 First, find out if the changes were intentional. If so, then resign if the
outcome will not result in great harm.

However, if a serious injustice would occur, then the analyst has an
obligation to convey that the information has been intentionally
mishandled.
Ethical Code or Ethos?
Conclusion – Professional policy analysts should create their own code of ethics. These should
include protecting the rights other individuals, “supporting our democratic process as expressed
in our constitutions, and to promote analytical and personal integrity.” (53)
Vining and Weimer
Chapter 4
Conceptual Fountations for Policy Analysis
Efficiency and the Idealized Competitive Model
I.
Collective Action
a. Enables society to produce, distribute and consume.
b. Policy analyst deals primarily with collective action involving the legitimate
coercive powers of government.
c. Public policy encourages, discourages, prohibits, or prescribes private actions.
d. Beginning with the premise that individuals generally act in their own best
interest, policy analysts bear the burden of providing rationales for any
governmental interference with private choice.
i. New as well as existing policies.
e. Essential step in any analysis and will often provide best insight into complex
situations.
f. Rationales begin with a perfectly competitive economy.
i. Idealized economies involving large numbers of profit-maximizing
consumers
ii. Patterns of production and consumption special in that, it is impossible to
change them to make one better off without making another worse off.
g. market failures
h. unchanging preferences of consumers
II.
i. other social values
The Efficiency Benchmark: The Competitive Economy
a. Assumptions
i. Utility
1. One’s perception of one’s own well-being
a. Derived from personal consumption
b. More is better
c. Bad goods decrease utility
d. Additional units of same good give ever smaller increases
in utility
ii. Production
1. firms maximize profits by buying factor inputs (labor, land, capital
and materials.
2. more costly in resources to produce each additional unit
3. firms behave in the belief they cannot change prices of inputs or
products
iii. Each person has a budget
1. maximizes that budget to increase utility
iv. prices reach a point where there is no reallocation possible that benefits
everybody
1. Pareto efficient
a. Divide $1000 between two people
b. Potential Pareto frontier
i. All possible allocations = $1000
ii. Anything less is not Pareto efficient
c. Actual Pareto frontier
i. Allocations 2 people receive if they reach no
III.
agreement
d. If they receive 0
i. actual equals potential
ii. anything would make one better off without
without worsening the other.
e. Idealized competitive economy is an example of
general equilibrium model
i. quantity demanded equals quantity supplied.
Market Efficiency: The Meaning of Social Surplus
a. Social surplus
i. Measures net benefits consumers and producers receive from participation
in the economy
1. good yardstick for measuring changes in efficiency
2. Pareto efficient allocation of goods maximizes social surplus in an
ideally competitive economy.
3. social surplus is sum of consumer surplus and product surplus
b. Consumer surplus
i. Demand schedule as marginal valuations
1. Value
a. Maximum amount consumer willing to pay
2. Consumer surplus
a. Difference between value and actual amount consumer
pays
3. marginal valuation schedule
a. how much successive units of a good are valued by
consumers in a market
4. demand schedule
a. state various prices and observe how many units would be
bought at each price.
5. measuring consumer surplus in actual markets
a. Pc=choke price
i. Chokes off demand
b. D=demand
c. at price Po this consumer can buy as much as she
wants
d. She buys Qo
If she had purchased less she would find she could raise her
utility by purchasing a little more.
If she had purchased more she would realize she could have
purchased less. (again utility and lessening value of more units of
same item.
e. At Po, Qo is equilibrium
a. PcaPo equals consumer surplus
f. Government increases price from Po to P1
a. PcbP1 equals consumer surplus
b. P1bcPo equals additional amount consumer must pay
Qo to Q1
c. Abc equals surplus consumer gives up
g. Example (Excise Tax)
a. Raises price from Po to P1
b. P1bcPo equals revenue from excise tax
i. Could be rebated to consumer to offset surplus
lost
ii. Consumer would still lose abc
iii. No revenues or benefits in abc so it is a
deadweight loss of the tax
iv. Deadweight loss indicates equilibrium price and
quantity under the tax are not Pareto efficient.
1. consumer would do just as well to write
a check for amount of P1bcPo and skip
the deadweight loss of abc.
v. loss of consumer surplus approximates
compensating variation.
vi. Compensating variation of a price change is the
amount by which the consumer’s budget would
have to be changed so that her or she would
have the same utility after the price change as
before
1. serves as dollar measure or “money
metric” for change in welfare
2. if demand schedule observed how
consumer varied purchases as a function
of price, holding utility constant at its
initial level
3. constant utility demand schedule
4. then consumer surplus change would
exactly equal compensating variation
h. compensating variation can be interpreted as a money
metric for utility
a. vertical equals expenditures on all goods other X
b. horizontal equals quantity of X consumed.
c. Starts with budget B but not allowed to buy X
d. Indifference curve Io equals all combinations of other
goods and X that would give her the same utility as
spending B on other goods but no X
e. Now she can buy X at Px
f. B/Px means she only buys X
g. Maximizes utility by selecting a point on highest
feasible indifference (I1), purchasing X1 units of X and
spending the rest of her budget on other goods
h. Possible to return to her original level of utility by
reducing initial budget by the distance between B and
C. This is her compensating variation associated with
availability of X at Px It is the dollar value of money
metric for how much value she places on being able to
consume X
i. Conversely, distance between B and A is money metric
of what we would have to give her if X were not
available so that she is as well off.
i.
i. Equivalent variation
in practice we use income as constant rather than utility
a. constant income is Marshallian demand schedule
i. decrease in utility as price rises and
consumption falls
ii. increase in utility as price falls and consumption
rises
b. marshallian is lower for price increases and higher for
price reductions
c. as long as price change is small and expenditures make
up for a small part of consumers budget then Marshallian
demand schedule and compensating variations are close.
j. Market demand schedule
a. sum of amounts demanded by each of the consumers at
each price
b. consumer surplus equals sum of consumer surpluses of
all individual consumers
c. how much compensation restores consumers after price
increase?
d. how much can be taken after a price decrease?
e. If we can identify a change in price or quantity in a
market that would produce a net positive increase in social
surplus, there is the potential for making a Pareto
improvement
IV.
Producer Surplus
a. Initial costs
i. Costs drop as number of units increases to equilibrium
ii. Costs rise as efficiency drops
iii.
iv.
v.
vi.
Some output level minimizes average costs of the firm
AC = average cost, MC = marginal cost
MC crosses AC at AC’s lowest point
When MC is lower than AC, AC must be falling. When MC is higher
then AC, AC must be rising. Only when MC = AC does AC remain
unchanged
vii. Qs = ACs-Qs=total cost ACsbQs0, add up marginal costs of producing
additional units from the first all the way to Qs. The smaller our unit of
measure, the closer will be the sum of their associated marginal costs to
the total cost of producing Qs.
viii. Market price is Ps. Maximized profits are at Qs where marginal costs =
price. Because AC is less than price at Qs firm’s profit would equal
PsabACs. Profit = total revenue – total cost, PsaQs0 – AcsbQs0. Profit
would be distributed to persons according their initial endowments. Profits
would incite others to copy
ix. As other firms enter, output increases and price decreases
x. New firms would bid up the price of inputs. Marginal and average cost
curves would shift up. Price would fall to PL. When marginal cost equals
average cost, profits fall to 0. There is then no incentive to enter the
industry.
xi. With no constraints on the number of firms producing exactly the same
good, Pareto efficient equilibrium is characterized by zero profits.
(economic profit). Economic profit equals total revenue minus payments
of competitive market prices to all factors of production, including an
implicit rental price for capital owned by the firm.
xii. Accounting profit equals revenue minus expenditures
xiii. Economic profit referred to as rents. Rents are any payments in excess of
V.
the minimum amounts needed to cover the cost of supply.
xiv. In the real world, firms cannot be instantaneously replicated. They will
enjoy rents for some time. As new firms are attracted, rents disappear.
xv. Dynamic process of profit-seeking moves economy toward competitive
ideal.
Rents
a. Monopolistic industry vs. competitive
b. D=demand, MR=marginal revenue curve
c. How much revenue increases for each additional unit offered to the market.
d. Lies below D because each unit lowers equilibrium price for all units sold.
e. 9 to 10 units, $100/unit to $99/unit, Revenue increases by 90
i. MR = 90
ii. D = 99
f. profit maximization happens when MC=MR
g. here Qm is at PM
h. profits = PmabACm
i. total revenue – total cost, PmQm – AcmQm
competitive – ignore effects of supply on market
MC = price, MC = D
Yields price Pc
Profits PcCdACc
The difference is profit between monopoly and competitive pricing is monopoly
rent, a type of economic rent.
o. The largest sum of consumer surplus and rent results when price equals marginal
cost.
i. Acf = deadweight loss due to monopoly pricing
Producer Surplus: Measurement of Supply Schedules
j.
k.
l.
m.
n.
VI.
a. How to sum the rents that accrue to all virms supplying the market.
i. Introduce supply schedule
ii. Show how supply schedule can be used to measure sum of rents
b. Firms offer Q2 at P2
i. As price increases firms supply greater quantities
ii. Upward sloping supply schedule
iii. Results from horizontal summation of MC of firms
iv. Total cost = area under supply curve from Qo to Q supplied
c. Suppose P3 and Q3
i.
ii.
iii.
iv.
v.
vi.
VII.
VIII.
Total cost is P1aQ3O
Total revenue is P3aQ3O
P3aQ3O – P1aQ3O = total rent = producer surplus = P3aP1
Not necessarily equally divided – unique advantages
Unique resources can earn rents
Excess payments to unique resources are scarcity rents
1. unlike monopoly rents, scarcity rents do not imply economic
inefficiency
2. changes in producer surplus = changes in rents
Social Surplus
a. Change in consumer surplus measures sum of compensating variations
b. Change in producer surplus measures change in rents
c. Sum of consumer and producer surplus = social surplus
d. Efficient compensating equilibrium = PoQo
i. P1 = decline in social surplus MV>MC
ii. P2 = decline in social surplus MC>MB
Three limitations to model
a. General equilibrium model is static, not dynamic
i. New goods, new tastes
b. General equilibrium model can never be complete
i. Not enough information
c. General equilibrium assumptions are often violated
i. Next two chapters
Chapter 4: Efficiency and the Idealized Competitive Model
*Premise: individuals act in their own best interest
*Classifying rationales for public policy: concept of a perfectly competitive
economy
 Circumstances of private choice are market failures (violate
assumptions of the idealized economies.
I. The Efficiency Benchmark: The Competitive Economy
A. Utility
i. Person derives utility from consuming various
amounts of all goods.
ii. Additional units of the same good give slight
increases to utility; more goods=more utility
(declining marginal utility)
iii. In a simple world, prices arise that distribute factor
input and goods to persons such that any
reallocation would make at least one person worse
off
1. Such a distribution is being Pareto Efficient
2. Always want to make Pareto improving moves
(from inefficient to efficient).
3. Idealized competitive economy is an example
of a general equilibrium model – quantity
demanded equals quantity supplied.
o Ex. The Allocation of $1000 between two people
 Horizontal axis is allocation to Person 2, Vertical is
allocation to Person 1. The line connecting these two is
the Pareto Frontier. Pareto frontier indicates the points
that fully allocate the $1000. Any allocation that does
not use up the entire $1000 cannot be Pareto efficient
since someone can become better off my increasing the
allocation without worsening the other.
II. Market Efficiency: The Meaning of Social Surplus
-Social surplus: net benefits consumers and producers receive from
participations in markets (Pareto efficient allocation of goods
maximizes social surplus).
A. Consumer Surplus: Demand Schedules as Marginal Valuations
o Ex: Soccer Tickets




You have five extra tickets to a sold out soccer match.
You sell them in a Dutch auction style, starting high
then gradually reducing the price until you sell one.
Then you lower the price again until all five are sold.
 Value=maximum amount a person will pay
 The difference between the valuation of the ticket
and the price they would have been willing to pay
is the surplus value gained from the transaction.
 In this case, the consumer surplus yield is $300
($100, $80, $60, $40, $20 respectively).
Marginal valuation schedule: indicates how much
successive units of a good are valued by customers in a
market.
Demand schedule: State various prices and see how
many are purchased at each price.
Measurement in actual markets:
 Demand schedule for good X
 Values all units less than choke price (Pc)
Po=purchase as much as she wants at that price;
purchases Qo
 If she bought less, it would be more
advantageous to buy a little more to utilize
the value, and if she bought more, she
would value the savings more than the lost
consumption.
o Ex: Government Policy that Raises Price

Excise taxes; the idea is that the revenue raised could
theoretically be rebated back to the customer to make
up for lost surplus, but the customer would still lose
triangle ABC (Fig. 4.3)
 This is a deadweight loss
o Compensating Variation: amount by which the consumer’s
budget would have to be changed so that he/she would have
the same utility after the price change as before.
 Dollar measure, or money metric for changes in welfare
o Equivalent variation: how much money to give if X were not


available so she is as well off as she was with X (Distance
between A and B on the vertical axis).
o Marshallian Demand Schedule: hold constant the consumer’s
income rather than utility. It is lower for price increases and
higher for price reductions.
o Price and Quantity Demands:
 Market demand schedule: achieved by summing
amounts demanded by each of the consumers
B. Producer Surplus: Background on Pricing
o Firms have fixed costs
 Output first falls as fixed costs are spread over time and
units, then rises as marginal costs begin to dominate.
 Only higher marginal costs can raise average costs.
o Total Cost of Producing Some Level of Output
 1st: Because AC is simply total cost divided by the
quantity of output, multiplying AC at this quantity yields
total cost.
 2nd: Since MC tells us how much it costs to increase
output by one additional unit, total cost can be
approximated by adding up marginal costs to the cost
of producing Qs.
o Firm maximizes profits by producing Qs, the quantity at which
cost=price.
 When price is above AC, there’s a firm profit.
 Profit=Total Revenue – Total Cost
 Total Revenue=Price (Ps) x Quantity (Qs)
As more firms enter the industry, output would rise,
price would fall.
 When MC = new AC, there are no more incentives
for entering the industry.
o Economic Profits: “Rents”
 -Economic profits are the total revenue minus payments
for all factors of production and payment to
shareholders for the capital it uses.
 Accounting profit: revenue minus expenditures.
 Rents – any payments in excess of the minimum


amounts needed to cover the costs of supply
 Rents decline over time with new firms.
C. Producer Surplus: Measurement with Supply Schedules
o Want to add all the rents from firms in a competitive market
 Use the Supply Schedule
 Comes from horizontal summation of the firms’
marginal cost curves
 Total cost=area under the supply curve from Qo
to Qs
IF market price is P3, then the quantity is Q2.
Cost is the area under the supply line, total
revenue is P3QeO (rectangle)
 Difference is the rent (produce surplus)
 Producer surplus need not be divided
equally among firms.
o Some firms have advantages that
allow them to produce at lower costs
Excess payments to unique resources are scarcity rents

Policy Analysis: Concepts and Practices
David L. Weimer and Aidan R. Vining
Chapter 5
PSC 723/EPS 710
Rationales for Public Policy: Market Failures
Chapter 5 begins with the basic economic premise that the “idealized competitive model
produces a Pareto-efficient allocation of goods.” In other words, the utility-maximizing behavior
of people and the profit-maximizing behavior of firms will distribute goods in a way that no one
could be better off without making anyone else worse off. This is referred to as the “invisible
hand” by economists. However, the real world doesn’t operate as neatly as a simple economic
equation. Deviations from this model and their underlying assumptions constitute market
failures. Traditional market failures are “shown as circumstances in which social surplus is
larger under some alternative allocation to that resulting under the market equilibrium.” The
four common market failures are: public goods, externalities, natural monopolies, and
information asymmetries. It is because of such failures that rationale exists for intervention
(usually from the government) in otherwise private affairs.
Public Goods:
Whether a good is considered public (or private for that matter) rest upon its degree of
consumption (rivalarous or nonrivalrous) and the extent of its ownership (excludable or
nonexcludable). Rivalrous consumption means that what one consumes cannot be consumed by
another (i.e. a pair of shoes). Nonrivalrous consumption allows more than one person to derive
benefits from some level of supply at the same time (i.e., national defense). Excludable
ownership means that one person has control over the use of a good; a good is nonexcludable
when it is impractical for one person to maintain exclusive control over its use (i.e., fish in the
ocean). For the most part, any good that is not purely private is considered a public good.
Finally a third characteristic related to demand, congestibility is also introduced. A good is
congested if the marginal social cost of consumption exceeds the marginal private cost of
consumption. The text cites a key point being “that some goods may only be nonrivalrous over
some range of usage, but at some higher level of use, consumers begin to impose costs on each
other.
The power to exclude others from use of a good hinges upon the property rights granted and
enforced. Effective property rights are characterized by clear and complete allocation of claims
and high levels of compliance by those who owe the corresponding duty. If the costs become too
high to enforce such rights, attempts to exclude others from use may be abandoned. In these
cases, the goods are effectively nonexcludable.
In distinguishing the supply/demand models for rivalrous goods and nonrivalrous goods is that
“the valuations of individual consumers cannot directly tell us how much of the nonrivalrous
good should be provided-only the sum of the valuations can tell us that. Once an output level
has been chosen, every person must consume it. Therefore, the various values different people
place on the chosen output level are not revealed by their purchases as they would be in a market
for a rivalrous good. Thus price neither serves as an allocative mechanism nor reveals marginal
benefits as it does for a rivalrous good.” One of the great advantages of the market for rivalrous
goods is that consumers automatically reveal their marginal valuations with their purchases.
Consumption of a good by one person may raise the marginal costs other persons face in
consuming the good which results in congestion. Whether a good is congested or not at any
particular time depends upon its level of demand at that time (i.e., highway roads). Care must be
given to distinguish between marginal social cost of consumption and the marginal cost of
production. A purely nonrivalrous and noncongestible good exhibits zero marginal costs of
consumption. Yet increments of the good (unless they occur naturally) require various factor
inputs to produce.
A classification of goods was provided in chart form with the rivalrous/nonrivalrous distinction
labeling the rows and the excludability/nonexcludability factor labeling the rows. In addition,
diagonal lines were drawn within each cell to represent the congestion factor resulting in the
following eight classifications of goods:
Rivalry, Excludability, Uncongested: Private Good (efficient market supply)
Rivalry, Excludability, Congested: Private Good with Consumption Externality
Nonrivalry, Excludability, Uncongested: Toll Good (No private supply at price zero;
underconsumption at any positive price)
Nonrivalry, Excludability, Congested: Toll Good with Crowding (Private supply can be
efficient if price at marginal social cost; usually involves complex, differentiated pricing)
Nonrivalry, Nonexcludability, Uncongested: Pure Public Good (Exclusion not possible, i.e.
national defense; free-riders)
Nonrivalry, Nonexcludability, Congested: Ambient Public Good with Consumption
Externality (Overconsumption because consumers ignore external cost; i.e., polluting a lake or
the air)
Rivalry, Nonexcludability, Uncongested: Free Good (Supply exceeds demand at zero price)
Rivalry, Nonexcludability, Congested: Open Access and Common Property Resources (Users
own the good in common; consumers respond to marginal private costs rather than marginal
social cost; inefficient overconsumption, underinvestment in preserving the stock of goods;
what’s not consumed by one will be consumed by another, i.e. forest used for firewood)
In summary, the efficiency implications of the various types of market failures involving public
goods are as follows: In toll good situations (nonrivalry/excludability), underconsumption arises
from economically inefficient pricing rather than a lack of supply; this problem is exacerbated by
congestion which results in the need for variable pricing to achieve efficiency. In the case of
pure and ambient goods (nonrivalry/nonexcludibility), the pervasiveness of free riding leads to
no market supply at all. Finally in the case of open access resources (rivalry/nonexcludability),
inefficiency results because individuals do not equate marginal social costs with marginal
benefits but, rather, marginal private costs with marginal benefits. Hence, they inefficiently
overconsume and inefficiently under-invest in enhancing open access resources.
Externalities
An externality is defined as “any value impact (positive or negative) resulting from any action
(whether related to production or consumption) that affects someone who did not fully consent to
it through participation in voluntary exchange.” The label externality problem is reserved for
those situations in which the good conveying the valued impact on non-consenting parties is the
byproduct of either the production or consumption of some good.
Some examples of negative externalities cited in the chapter include the air and water pollution
generated by firms in their production activities, the cigarette smoke that non-smokers encounter
in public places, and the unsightliness generated by a dilapidated house in a well-kept
neighborhood. Persons who suffer these externalities may place different values on them.
Examples of positive externalities include vaccinations that reduce everyone’s risk of infectious
disease and the benefits that neighbors receive from a homeowner’s flower garden and well-kept
house. The chapter also mentions an increasingly important externality arising from the use of
communication networks. (Think shared music files.)
Externalities arise in either production or consumption. Production externalities affect either
firms (producer-to-producer externalities) or consumers (producer-to-consumer externalities);
consumption externalities may also affect the activities of firms (consumer-to-producer
externalities) or those of other consumers (consumer-to-consumer externalities). The same
activity may constitute a positive externality for some, but a negative externality for others.
Through a series of economic charts and graphs, the authors show that in the presence of a
negative externality, firms will produce too much of the private good that generates the
externality. Ronald Coase’s work in studying externalities is mentioned and his argument that “in
situations in which property rights are clearly defined and costless to enforce, and utility is linear
in wealth, costless bargaining among participants will lead to an economically efficient level of
external effect” is analyzed. This theorem’s limits are tested when there are many parties
involved in an issue and furthermore the authors recognize the restrictive assumption of the
Coase model since it assumes zero transaction costs in the exercise of property rights.
Natural Monopoly
Natural monopoly occurs when “average cost declines over the relevant range of demand.” In
such a case, a single firm can produce the output (goods) at lower cost than any other market
arrangement, including competition. While the cost-and-demand conditions establish the
existence of a natural monopoly situation, the price elasticity of demand (how responsive
consumers are to price changes) determines whether the natural monopoly has important
implications for public policy. Specifically, the price elasticity of demand is defined as the
percentage change in the quantity demanded that results from a 1 percent change in price. When
demand is inelastic an increase in price will increase total revenue. A good is unlikely to have
inelastic demand if there are other products that are close substitutes.
Through an economic chart, the authors show that if forced to price at an economically efficient
level, the natural monopolist would suffer a loss and would go out of business in the absence of a
subsidy to offset that loss. A natural monopoly can thwart potential competitors when there are
significant barriers to entry of that market, in particular if that barrier is cost. The established
firm can simply lower prices temporarily to fight a new competitor. Another characteristic of the
natural monopoly is that its economies of scale are exhausted as output increases. Almost all
natural monopoly regulation correspond to existing city, county, state, and federal boundaries;
but the economic reality of a natural monopoly knows no such bounds.
The chapter then briefly discussed the phenomenon called “X-inefficiency”. This describes the
situation when a monopoly does not achieve the minimum costs that are technically feasible.
This is also known as cost inefficiency, operating inefficiency, or productive inefficiency.
In summary, natural monopoly inherently involves the problem of undersupply by the market.
The extent of undersupply depends on the particular cost-and-demand conditions facing the
monopolist and the extent to which the market can be contested. Natural monopoly may involve
additional social surplus losses because the absence of competition permits production at greater
than minimum cost to persist.
Information Asymmetry
Information asymmetry is defined as situations in which the amount of information about the
characteristics of a good varies in relevant ways across persons; in other words there’s an
unequal amount of information between the buyer and the seller about a good. Market failure
due to information asymmetry exists when the producer does not supply the amount of
information that maximizes the difference between the reduction of deadweight loss (any
deficiency due to an inefficient allocation of resources) and the cost of providing the
information. The obvious disincentive for producers to provide information is when the
consumer overestimates the quality of a good is lower prices and lower revenues for the
producer.
There are three categories of goods when information asymmetry is likely to lead to market
failure: Search goods – goods consumers can determine its characteristics with certainty prior to
purchase, such as a chair; Experience goods – goods that consumers can determine its
characteristics only after purchase, such as a meal, haircut, concert, etc. and; Post-experience
good – goods for which its difficult for consumers to determine their quality even after
consumption.
Search goods rarely involve information asymmetry that leads to market inefficiency; in other
words public policy intervention is rarely needed or justifiable. Experience goods on the other
hand have the potential for serious inefficiency by their very nature (quality can only be
determined by consumption). The greatest potential for inefficiencies come from postexperience goods because the consumer has difficulty in recognizing the causality between
consumption and some of its effects (or side-effects) and therefore require policy intervention in
most cases.
David L. Weimer and Aidan R. Vining
Chapter 5
Rationales for Public Policy: Market Failures

Deviations from the traditional economic model and it’s underlying assumptions
constitute market failures.

Traditional market failures are “shown as circumstances in which social surplus is larger
under some alternative allocation to that resulting under the market equilibrium.”

The four common market failures are: public goods, externalities, natural monopolies,
and information asymmetries. It is because of such failures that rationale exists for
intervention (usually from the government) in otherwise private affairs.
Public Goods:

Whether a good is considered public (or private for that matter) rest upon its degree of
consumption (rivalarous or nonrivalrous) and the extent of its ownership (excludable or
nonexcludable).

Rivalrous consumption means that what one consumes cannot be consumed by another
(i.e. a pair of shoes).

Nonrivalrous consumption allows more than one person to derive benefits from some
level of supply at the same time (i.e., national defense).

Excludable ownership means that one person has control over the use of a good; a good is
nonexcludable when it is impractical for one person to maintain exclusive control over its
use (i.e., fish in the ocean).


For the most part, any good that is not purely private is considered a public good.
Finally a third characteristic related to demand, congestibility is also introduced. A good
is congested if the marginal social cost of consumption exceeds the marginal private cost
of consumption (more people using the good means less benefit to everyone). The text
cites a key point being “that some goods may only be nonrivalrous over some range of
usage, but at some higher level of use, consumers begin to impose costs on each other.

The power to exclude others from use of a good hinges upon the property rights granted
and enforced. Effective property rights are characterized by clear and complete
allocation of claims and high levels of compliance by those who owe the corresponding
duty. If the costs become too high to enforce such rights, attempts to exclude others from
use may be abandoned. In these cases, the goods are effectively nonexcludable.

In distinguishing the supply/demand models for rivalrous goods and nonrivalrous goods
is that “the valuations of individual consumers cannot directly tell us how much of the
nonrivalrous good should be provided-only the sum of the valuations can tell us that.
Once an output level has been chosen, every person must consume it. Therefore, the
various values different people place on the chosen output level are not revealed by their
purchases as they would be in a market for a rivalrous good. Thus price neither serves as
an allocative mechanism nor reveals marginal benefits as it does for a rivalrous good.”
One of the great advantages of the market for rivalrous goods is that consumers
automatically reveal their marginal valuations with their purchases.

Consumption of a good by one person may raise the marginal costs other persons face in
consuming the good which results in congestion. Whether a good is congested or not at
any particular time depends upon its level of demand at that time (i.e., highway roads).
Care must be given to distinguish between marginal social cost of consumption and the
marginal cost of production. A purely nonrivalrous and noncongestible good exhibits
zero marginal costs of consumption. Yet increments of the good (unless they occur
naturally) require various factor inputs to produce.

Classification of Goods:



Rivalry, Excludability, Uncongested: Private Good (efficient market supply)
Rivalry, Excludability, Congested: Private Good with Consumption Externality
Nonrivalry, Excludability, Uncongested: Toll Good (No private supply at price
zero; underconsumption at any positive price)

Nonrivalry, Excludability, Congested: Toll Good with Crowding (Private supply
can be efficient if price at marginal social cost; usually involves complex,
differentiated pricing)

Nonrivalry, Nonexcludability, Uncongested: Pure Public Good (Exclusion not
possible, i.e. national defense; free-riders)

Nonrivalry, Nonexcludability, Congested: Ambient Public Good with Consumption
Externality (Overconsumption because consumers ignore external cost; i.e., polluting
a lake or the air)

Rivalry, Nonexcludability, Uncongested: Free Good (Supply exceeds demand at
zero price)


Rivalry, Nonexcludability, Congested: Open Access and Common Property
Resources (Users own the good in common; consumers respond to marginal private
costs rather than marginal social cost; inefficient overconsumption, underinvestment
in preserving the stock of goods; what’s not consumed by one will be consumed by
another, i.e. forest used for firewood)
In summary, the efficiency implications of the various types of market failures involving
public goods are as follows:
o In toll good situations (nonrivalry/excludability), underconsumption arises
from economically inefficient pricing rather than a lack of supply; this
problem is exacerbated by congestion which results in the need for variable
pricing to achieve efficiency.
o In the case of pure and ambient goods (nonrivalry/nonexcludibility), the
pervasiveness of free riding leads to no market supply at all.
o Finally in the case of open access resources (rivalry/nonexcludability),
inefficiency results because individuals do not equate marginal social costs
with marginal benefits but, rather, marginal private costs with marginal
benefits. Hence, they inefficiently overconsume and inefficiently under-invest
in enhancing open access resources.
Externalities

An externality is defined as “any value impact (positive or negative) resulting from any
action (whether related to production or consumption) that affects someone who did not
fully consent to it through participation in voluntary exchange.” The label externality
problem is reserved for those situations in which the good conveying the valued impact
on non-consenting parties is the byproduct of either the production or consumption of
some good.

Some examples of negative externalities cited in the chapter include the air and water
pollution generated by firms in their production activities, the cigarette smoke that nonsmokers encounter in public places, and the unsightliness generated by a dilapidated
house in a well-kept neighborhood. Persons who suffer these externalities may place
different values on them.

Examples of positive externalities include vaccinations that reduce everyone’s risk of
infectious disease and the benefits that neighbors receive from a homeowner’s flower
garden and well-kept house. The chapter also mentions an increasingly important
externality arising from the use of communication networks. (Think shared music files.)

Externalities arise in either production or consumption. Production externalities affect
either firms (producer-to-producer externalities) or consumers (producer-to-consumer
externalities); consumption externalities may also affect the activities of firms (consumerto-producer externalities) or those of other consumers (consumer-to-consumer
externalities). The same activity may constitute a positive externality for some, but a
negative externality for others.

Through a series of economic charts and graphs, the authors show that in the presence of
a negative externality, firms will produce too much of the private good that generates the
externality.

Ronald Coase’s work in studying externalities is mentioned and his argument that “in
situations in which property rights are clearly defined and costless to enforce, and utility
is linear in wealth, costless bargaining among participants will lead to an economically
efficient level of external effect” is analyzed. This theorem’s limits are tested when there
are many parties involved in an issue and furthermore the authors recognize the
restrictive assumption of the Coase model since it assumes zero transaction costs in the
exercise of property rights.
Natural Monopoly

Natural monopoly occurs when “average cost declines over the relevant range of
demand.” In such a case, a single firm can produce the output (goods) at lower cost than
any other market arrangement, including competition. While the cost-and-demand
conditions establish the existence of a natural monopoly situation, the price elasticity of
demand (how responsive consumers are to price changes) determines whether the natural
monopoly has important implications for public policy. Specifically, the price elasticity
of demand is defined as the percentage change in the quantity demanded that results from
a 1 percent change in price. When demand is inelastic an increase in price will increase
total revenue. A good is unlikely to have inelastic demand if there are other products that
are close substitutes.

Through an economic chart, the authors show that if forced to price at an economically
efficient level, the natural monopolist would suffer a loss and would go out of business in
the absence of a subsidy to offset that loss. A natural monopoly can thwart potential
competitors when there are significant barriers to entry of that market, in particular if that
barrier is cost. The established firm can simply lower prices temporarily to fight a new
competitor. Another characteristic of the natural monopoly is that its economies of scale
are exhausted as output increases. Almost all natural monopoly regulation correspond to
existing city, county, state, and federal boundaries; but the economic reality of a natural
monopoly knows no such bounds.

The chapter then briefly discussed the phenomenon called “X-inefficiency”. This
describes the situation when a monopoly does not achieve the minimum costs that are
technically feasible. This is also known as cost inefficiency, operating inefficiency, or
productive inefficiency.

In summary, natural monopoly inherently involves the problem of undersupply by the
market. The extent of undersupply depends on the particular cost-and-demand conditions
facing the monopolist and the extent to which the market can be contested. Natural
monopoly may involve additional social surplus losses because the absence of
competition permits production at greater than minimum cost to persist.
Information Asymmetry

Information asymmetry is defined as situations in which the amount of information about
the characteristics of a good varies in relevant ways across persons; in other words there
is an unequal amount of information between the buyer and the seller about a good.
Market failure due to information asymmetry exists when the producer does not supply
the amount of information that maximizes the difference between the reduction of
deadweight loss (any deficiency due to an inefficient allocation of resources) and the cost
of providing the information. The obvious disincentive for producers to provide
information is when the consumer overestimates the quality of a good is lower prices and
lower revenues for the producer.

There are three categories of goods when information asymmetry is likely to lead to
market failure:
o Search goods – goods consumers can determine its characteristics with certainty
prior to purchase, such as a chair
o Experience goods – goods that consumers can determine its characteristics only
after purchase, such as a meal, haircut, concert, etc.
o Post-experience good – goods for which it’s difficult for consumers to determine
their quality even after consumption.

Search goods rarely involve information asymmetry that leads to market inefficiency; in
other words public policy intervention is rarely needed or justifiable.

Experience goods on the other hand have the potential for serious inefficiency by their
very nature (quality can only be determined by consumption).

The greatest potential for inefficiencies come from post-experience goods because the
consumer has difficulty in recognizing the causality between consumption and some of
its effects (or side-effects) and therefore require policy intervention in most cases.
Policy Analysis: Concepts and Practice
Chapter 6: Rationales for Public Policy: Other Limitations of the Competitive
Framework
David L. Weimer and Aidan R. Vining
Purpose:
This chapter covers the rationale for public policies that arise out of need created by market
inefficiencies. In this chapter a number of situations in which a public policy could be
implemented in order to provide relief or stability in the economic system when a market failure
takes place are described for use by policy analysts. It is important to be able to identify these
failures so that an analyst can determine the reason for the public policy. If the policy is not
based upon the need created by a market failure then it comes from a desire to meet other needs
not related to economic stability and efficiency that are covered in the next chapter.
General Competitive Market Problems that create Public Policy Opportunities



The competitive model is static
Any changes in the model result in a new equilibrium
Assumes no transaction costs or adjustment costs will be incurred when moving between
equilibriums

The real economy changes constantly, markets adjust but there are problems
o Sticky prices – prices and wages that can’t adjust immediately
o These are not always market failures (though they are sometimes as we will see in
the rest of this chapter)
o Public policy programs can create more efficient economies
 Example: unemployment benefits can help in job transitions
Descriptions of Market Failures and Policy Opportunities:

-
-
Thin Markets
Perfect competition requires that the price be independent from the actions of individual
buyers or sellers within the market; it must be set by the market as a whole
When there are not enough players in the market (buyers or sellers) then Paretoinefficiency will result
o Natural monopolies – more than one firm in the market is inefficient but having
only one firm that is maximizing profits results in too little production
o Monopsony – single buyer but many suppliers
o Oligopoly – when a few firms command a significant fraction of all output
(textbook example: four firms controlling 40% or more of all production)
 The collusion that this encourages is the basis of most anti-trust law
All of these situations serve as opportunities for public policy to correct a market
inefficiency

-
Fixed Preferences
Competitive model assumes a fixed utility function, however, preferences must be
created and can change in the real world. Further complicating the model is the fact that
many preferences and changes in preferences come from outside the economic realm and
are impossible to predict.
-
Example: Advertising - does it give information to alter brand or type of product that you
need to reach maximum utility (an acceptable function under fixed preferences because
your overall consumption does not change) or does it alter you preferences by making
you “need” more in order to be happy
o Addictive products can also change preferences
Economists can relax the assumptions of the competitive model by:
o Dealing with households instead of individuals
o Limit preferences to those that are based on consumption of goods
 This ignores external factors such as competition with peers, religion,
-
-

-
marital status, etc.
Public policy may still be needed to deal with preferences that may not result in positive
outcomes for society or the market. In this case public policy seeks to alter preferences
of individuals that negative external consequences; like substance abuse counseling or
compulsory public education.
Fairness
People take equity into account when making economic decisions
-
This can result in actions that do not fit in the framework of the competitive model but
are still rational.
Positive results may be given up if the situations is not fair – but this is subjective and
nearly impossible to predict
Because of this and the fact that preferences are, in fact, not fixed the competitive model
is complicate and the results on Pareto-efficiency are not fully understood
This presents an opportunity for public policy but care should be taken when using
preference and fairness problems to justify public policy as many of these issues will
touch on moral values and behavioral expectations

-
Rational Decisions
Prospect theory stipulates that people can make decision that are rational but do not
maximize utility – decisions based on fairness is an example of this
o Gains and losses can depend on the status quo and people tend to place a higher
emphasis on gains (people are aversive to losses even when utility is not
maximized)
o The expected utility hypothesis is, therefore, often not reliable
 Expected utility formula = pU(Wa)+(1-P)U(Wb)

Time Extensions in the Competitive Market
o Problems with the competitive model
 Competitive models are static and this requires that we treat goods and
preferences differently for all possible situations


-
Buy swimsuits in the winter and parkas in the summer
Risk and Insurance
insurance can offset risks posed by timing problems in the market
insurance is efficient when premiums equal the expected payout, but there is uncertainty
on both ends in this area
 probability of occurrence of an event can be hard to measure, especially
with rare events
 This causes inefficient pricing due to “risk premiums”
 Accumulated risk increases prices even more (this is the chance that the
insurer will occur multiple payouts related to the same event)

Can be offset by diversification; either geographic or product
diversification, but the effects are still present in the market



Risk problems are increased by the presence of adverse selection problems
created by imperfect information (information asymmetry) and moral
hazard problems created by the behavior of covered consumers
Risk is subjective, approximated, and dependent on saliency of issues
Public policy can help economic efficiency in these situations by easing
the uncertainty in the market thereby lessening the risk

Mandatory auto insurance for all drivers allows insurance
companies to overcome adverse selection problems – everyone
needs insurance not just bad drivers.

Myopic markets
o The competitive model is short sighted
o It is possible to make contracts now for future production in all forthcoming
periods that are Pareto-efficient
 Made possible by marginal rate of time preference (people don’t care
about giving something up now in order to get more later or getting more
now and giving something up later)
 This must be at the market interest rate

Capital Markets
o This market is in equilibrium when loan demand = loan supply
o The interest rate is the price set by this market
o However, moral hazards lead lenders to reduce the amount that can be borrowed
o Some public policy can be justified based on imperfect capital markets created by
moral hazard such as the adjustment of interest rates and requirements for reserve
to loan ratios
o Investment
 Public policy generally seeks to encourage investment
 Generations overlap so preferences are foreseeable
 People generally do not want to be all consuming, they want to leave
something to the next generation
 In order for this to happen in a competitive economy return must equal or
exceed interest expenses
 The idea of investment applies to nonrenewable resources as well as
money – this is generally a problem of over consumption
o Over consumption
 Not generally a problem with input products such as oil



Adequate reserve stocks will be kept and market allocations are
likely to be just as good as collective public allocations
Resources that are not inputs are more susceptible to over consumption
This is another opportunity for rational public policy

Option Demand – nonusers are willing to contribute to
maintenance costs because they want the option of future use



Existence Value – the good has inherent worth regardless of
whether or not an individual is a user
Public policy can deal with specific concerns about the efficiency of
capital markets and the adequacy of the market to handle certain
circumstances
Opportunities for Public Policy - Summary
o Efficiency in the market breaks down
o The market does not have an adequate way of dealing with a situation
o Nature of the competitive model prevents efficiency or precludes market action
o Macro level public policy solutions that can be implemented
 Monetary policy – policies that effect the money supply
 Fiscal policy – policies that impact taxation and expenditures by the
government
Weimer and Vining; Policy Analysis: Concepts and Practice
CH. 6 Summary; Rationales for Public Policy: Other Limitations of the Competitive Framework
This chapter describes the financial processes that are often looked at by public policy analysts in
order for them to implement the most effective and rational economic policies.
There are two fundamental assumptions of the Competitive Model
1. Participants in markets behave competitively
2. Individual preferences can be taken as fixed and fully rational
Thin Markets: Few Sellers or Few Buyers

Having only one seller allows for a monopoly where profits are maximized through a
reduction in production. Eventually, this monopoly will fade as others move in to fill the
production gap.

A single buyer can influence prices as well by forcing prices down through competition
for the buyer’s money.

Serving as an intermediate between perfect competition and a perfect monopoly, is when
a few sellers exist and serve to compete with one another. Unfortunately, if there are only
a few sellers with production power, they can realize their mutual dependence and create
their own, joint monopoly.

Any imperfect competition can lead to prices that differ from the equilibrium, resulting in
an inefficient allocation of inputs and goods.

Each of these situations creates an opportunity for public intervention, and public policy
reform.
I.
The Source and Acceptability of Preferences
Endogenous Preferences

It has often been argued that people either have fully developed preferences at birth, or
preferences are formed through participation in society.

It has been the belief of public policy analysts that preferences are primarily
economically determined.

This perception that preferences can be changed due to circumstance has thus been the
basis for many public policies.

Hence, advertisements exist everywhere attempting to change people’s preferences.
o In the past, advertising used to increase demand in certain brands, revealing that
people must have already desired the product itself, but now advertising increases
demand in actual goods. An example of this is technology, to which advertising
has been geared towards convincing people that they must have the latest phone,
music player, etc.

Certain preferences can negatively affect others however. The book states that the policy
of universal education was created due to this fact, so that those whose preference it was
to pursue education were not placed in too much of a higher position than those who did
not.
Utility Interdependence: Other-Regarding Preferences


Parents typically care deeply about the goods their children consume.
This interdependency among family members is why the household, rather than the
individual, is typically taken as the consuming unit.
Taste for Fairness: Process-Regarding Preferences

Ultimatum games
o If a certain amount of money is to be given to two parties, and one of them
walking away would mean that neither would receive anything, then the obvious
answer is for them to try and split it evenly.
o Both parties, however, will prefer to try and get as much as they can, or threaten
to walk away. This is where negotiations come into play.
o Eventually the money may be split 60/40 or 30/70, as an example, with the
stronger party walking away with slightly more.

Such negotiations clearly come into play within the realm of public policy. According to
the authors, negotiations typically take place when discussing and determining nuclear
waste policy.
o Yucca Mountain could be used as an example.

Overall, perceived fairness is a major determinant of acceptability of any negotiation or
policy.
Legitimacy of Preferences


Asks the question “are all preferences equally legitimate?”
Clearly not. According to the authors, certain consensual sex acts that do not harm
others, have been met in the past with public policies created to thwart such behaviors.

Within the realm of public policy, this raises the issue of which would be more
appropriate, for public policies to restrict certain behaviors, or private entities to
persuade people against them? Both of which do occur.
Reprise of Preference Problems

The authors conclude that “our relatively poor understanding of preferences should lead
us to tread carefully in using perceived problems with them to justify public policies.”
II.

The Problem of Uncertainty
There is a problem of uncertainty when making any decisions in life.

For example, the authors describe people who are considering buying skis. These people
have to consider whether it will truly be a smart investment, considering the fact that this
year or subsequent years could have too light or heavy snow.
Availability of Insurance

Insurance serves as a measure to guarantee that each person’s utility will remain constant
no matter what state of nature occurs.

Within the realm of insurance:
o Risk is defined as having knowledge of one’s probabilities.
o Uncertainty is defined as having no knowledge of the probabilities.


As a general rule, insurers tend to charge more to cover their administration costs.
In order to set fair prices, insurers must know the probabilities of certain occurrences.
o Therefore, the most common types of insurance protect against frequent
occurrences collected from past experiences.
o An example of this is the rate of car insurance being higher for young males.

In addition to the prices insurers set, they also apply a Risk Premium, which is an
additional charge to reflect their lack of confidence in these estimates of common past
occurrences being able to directly affect the individual customer’s actions.
Incomplete Insurance Markets: Adverse Selection and Moral Hazard

Those with higher probabilities of having an accident see insurance as attractive and
continue to buy.

Eventually, however, those with less chance of having an accident believe that the
insurance is not beneficial for them and decide to no longer buy.

This drives up costs of insurance, since the insurer now mainly has to cover and pay out
for the hazardous.

This entire process is referred to as Adverse Selection.
o Health Care is clearly a good example of this.
o Mandatory automobile insurance, hence serves to drive costs down.


Moral Hazard refers to co-payments.
Co-payments come into play in order for insurers to dissuade customers from behaving
haphazardly.
Subjective Perception of Risk: General Issues Related to the Rationality of Decision Making

So far it is assumed that people effectively evaluate and use information to arrive at
rational decisions in situations involving risk.

Problem: People often estimate the probability of events by the ease with which
instances or occurrences can be brought to mind.
o As an example, in a study of flood and earthquake insurance coverage, it was
revealed that knowing someone who suffered from either of these disasters was
the single most important factor for distinguishing between those who decided to
purchase and those who did not.
Additionally:

People place more weight on losses than on gains.



A simultaneous loss and gain of the same size is not felt equally.
People prefer a smaller certain gain to a larger uncertain one.
People prefer larger probable loss to smaller certain loss however.
How does this relate to public policy?


It reveals to policy makers how people think in terms of their rationale.
Policy makers need to assess the ways in which they view risks, and the author suggests
that public insurance is thus justified.
III.
Intertemporal Allocation: Are Markets Myopic?

People are willing to either sacrifice something now in order to receive more in the
future, or take more now and sacrifice something in the future.

An example of this is a person saving now and enjoying their retirement, or borrowing in
order to perhaps enjoy life now and have to work when they are older to compensate for
debt.
Capital Markets


What determines the rate of interest?
With interest, borrowers who owe a large percentage of income may be tempted to
reduce work effort as they realize that they are gaining a smaller net return for their labor
than if they were debt free.


Companies wish to insure against this.
Investments also tend to depreciate over time (technology excluded).

Because investment in the competitive economy demands rates of return at least as high,
public policies to increase investment in the future are typically advocated.

Policies to increase investment are additionally put into play because people want to
leave something behind for their children.

One must also be rational when investing, however, because while low energy costs
make investing in oil petroleum plants very risky, they could potentially make investing
in travel smart.
o Petroleum is a good example of owners holding back resources for scarcity
reasons, forcing higher demand, and perhaps causing people to look at
substitutes.
o In this respect, private markets do in fact often determine policies.
IV.
Adjustment Costs

As long as prices are free to move in response to changes in supply and demand, people
will change their consumption to maximize profits in response to new prices.

An example of this can be seen in the fact that as gas prices rose, so did public
transportation.
V.



Macroeconomic Dynamics
Overall, the economy goes through cycles of expansion and recession.
Policy must stimulate investment by lowering interest rates.
And the authors’ conclusion is that policy analysts need more advances to give advice
about economic efficiency.
Chapter 7
Rationales for Public Policy
This chapter starts off defining efficiency with regards to these two principles:
Pareto Principle: The inability to make someone better off without making someone else worse
off.
This offers a way of ranking allocations of goods without making explicit comparisons of the
utilities of individuals.
Social Welfare Function: Allocation of goods that maximizes the greatest good.
The difference between these two definitions with regards to efficiency that when a group of
people who work independently of each other, and have a fixed quantity of goods, will have the
Pareto effect. It would be impossible for them to shift wealth (quantity of goods) to increase
someone’s utility, without hurting, or taking away from, someone else. However, if the group
works together, the allocation of wealth that maximizes the greatest good is exactly equal shares
for each person, assuming that each person has identical utility with all the others.
The table (7.1) shows three different socially optimal policy choices for a three person society.
The first category is utilitarian.
Utilitarianism: It is a consequentialist philosophy in that actions are to be evaluated in terms of
the preferences of individuals for various consequences, which can then be aggregated. This is
considered the greatest good because the utilities of the people are added up. This is in
democratic spirit because it posits that the utility of everybody counts, no matter rank. A
criticism however is that it offers weak protection for fundamental individual rights because it
does not guarantee minimal allocation to individuals.
The next category is Rawlsian.
Rawlsianism: It is a highly equalizing social welfare function. John Rawls posits “the greatest
benefit of the least advantaged members of society.” It is an idea that if people must decide on a
system of social institutions without knowing what their own endowments will be in society,
they will be more likely to select a social welfare function that raises the position of the least
advantaged. This would lead to great equality of outcomes. A criticism of Rawlsianism is that is
proposes extreme redistribution that reduces incentives to create wealth.
Lastly,
Multiplactive: This avoids allocations with very low levels of utility to any individuals.
Individuals would much rather have allocations that maximize average utility with some floor
constraint. As you can see in the table, this category has the greatest maximization of goods.
Instead of defining social welfare as some function of personal utilities, it is given as a function
of either the quantities of goods consumed by each person or the economic resources, like
income or wealth, available to each person for purchasing goods of choice. When the social
welfare function depends on the consumption of specific goods, society places values on
consumption patterns without direct regard for individual preferences.
Measuring Changes in Social Welfare: Social Indicators
A variety of quantitative measures have been proposed to gauge changes in social welfare when
social welfare functions are impractical.
-Gross National Product= This is the market value of the output of final goods and services
produced by a nation’s economy. It is measured in two ways.
1) The sum of expenditures on final goods and services by consumers, businesses,
government, and foreigners; 2) The sum of payments to the factors of production.
However, there are a couple reasons why there are limits to using this as a
measure.
1) GNP measures the market value of goods and services in current prices so that
increases in general price levels inflate the GNP estimates even in the absence of
increases in output. 2) GNP does not account for the depreciation of plants,
equipment, and residential structures that offsets the addition to productive
capacity resulting from new investment.
Even though there are problems in interpreting the GNP, with all things being equal, the larger
the real GNP, the better off the people living in the economy are.
-Unemployment, Inflation, and the Balance of Payments
Unemployment rates have both efficiency and distributional dimensions. A lower
unemployment rate is generally desirable. However, it can be too low. Overall efficiency may
suffer because labor cannot as easily move to jobs where it is valued most. The economically
efficient unemployment rate may be larger than zero to accommodate the movement of labor
among jobs.
Inflation involves similar problems of interpretation. Changes in the Consumer Price
Index (CPI) commonly serve as a measure of inflation. This is an index of how much it costs in
current dollars to buy a fixed basket of market goods relative to its cost in some base year.
Lower rates of inflation are usually viewed as more desirable than higher rates. Higher rates
generally are associated with great uncertainty about the future. Also, they risk creating
“inflationary expectations” that undermine confidence in the monetary system and lead to
disruptive hyperinflation.
Balance of Payments can possibly be the most ambiguous economic indicator. Balance
of payments is the difference between the dollar value of goods and services exported and the
dollar value of goods and services imported. A negative balance denotes a trade deficit, which
can be interpreted as weakness. However, if we are paying funds overseas, foreigners must do
something with dollars they accumulate from the trade deficit. That something is investing in the
U.S. economy.
There are also non-economic indicators that provide measures of various dimensions of
social welfare. Infant mortality rates can reflect the diets and health care available to women.
Others include crime rates, adult life expectancy, smog free days, and educational achievement.
When using non-economic indicators, it is important to determine both their conceptual validity
and their accuracy of measurement.
Substantive Values Other Than Efficiency
Viewing market failure as a necessary condition for government intervention implies that Pareto
efficiency is the only appropriate social value. An argument can be made for always including
efficiency as a substantive value in policy analysis. The example given is that only the
malevolent would oppose making someone better off without making anyone else worse off.
Some important substantive values:
-Human Dignity: Equity of Opportunity and Floors on Consumption
A good society must have mechanisms for limiting the extent to which any person’s
choices interfere with the choices of others. What happens when people are so poor, they cannot
participate in the market? Someone who has no endowments would be effectively barred form
participating. Without any endowments, people cannot express their choices of private goods at
all. Survival depends on the consumption of at least some private goods. Therefore, viable
participation in market exchange requires some minimal endowment of assets. Once everyone
reaches some minimum level of consumption, preservation of human dignity does not
necessarily call for further redistribution to increase equality. Respect for human dignity seems
to justify public policies that ensure some minimum level of consumption to all members of
society.
-Increasing the Equality of Outcomes
The U.S government regularly estimates how much income families must have to
consume a set of basic goods that were considered necessary for decent survival in 1965. The
number of persons above this “poverty line” often serves as a measure of success of government
programs. When looking back at the table 7.1 on p.134, the Rawlsian function leads to great
equality of outcomes. Once again, this is assuming everyone has identical utility capabilities.
Under these assumptions, the more equal the distribution of any given level of wealth, the higher
the ranking of that distribution by the social welfare function.
a. Vertical Equity: which is those with greater wealth should pay higher taxes so
that everyone gives up the same amount of utility
b. Horizontal Equity: requires that those in similar circumstances be treated alike
We should expect that the total available wealth to shrink with the greater the amount of
redistribution attempted. Here, the “Leaky Bucket Model” by Arthur Okun- Try to transfer a
little water, we will lose a little, try to transfer a lot, we will lose a lot.
-Preserving Institutional Values
Governments can draw their legitimacy from constitutions, whether formal or informal.
Constitutions can draw their legitimacy from the people. Because constitutions maintain
legitimacy through adherence, keeping public policy within the bounds of recognized
constitutional principles is a social value. Within constitutional frameworks, societies benefit
when people voluntarily comply with laws. Voluntary compliance reduces enforcement costs
and also reflects the legitimacy of the political system. A factor that seems to contribute to
adherence is the perception of fairness. There is a social value in making policies correspond to
common perceptions of fairness.
Some Cautions in Interpreting Distributional Consequences
-Measurement Issues
Personal income, the flow of payments to persons for use of the input factors, such as
labor, land, capital, provides a conceptually attractive measure of purchasing power. Income,
which is commonly measured, deviates from purchasing power in several important ways. First
of all, not all wealth is fully reflected in measured income. What if you own your house instead
of renting it? Renters have their wealth reflected in their income; Home owners do not. Should
they be viewed as having the same economic circumstances?
Second, government tax and transfer programs alter the amount of “disposable” income.
After-tax incomes can be measured or predicted with a good level of confidence. However, other
deductions and adjustments that arrive at taxable income imply that taxpayers with the same pretax income have very different disposable incomes. With respect to transfer programs, cash
benefits are more easily figured into disposable income than in-kind benefits such as subsidized
housing and health care. Assessing the cumulative effect of transfer programs is especially
complicated when eligibility depends on income from other sources.
Thirdly, individuals usually consume as members of a household, however, not all
members of a household necessarily contribute income toward that consumption. Examples
would be children, teenagers, and retired seniors. Also, per person cost of providing basic goods
is generally smaller for multimember homes than for single person homes. This suggests that
comparisons of income better reflect basic consumption opportunities if they are done on the
basis of households rather than per capita.
-Index Issues
Comparing distributions poses the problem of choosing the right metrics. First problem is
characterizing a distribution. Commonly used measures (which we all remember from our
methods classes) are the median and mean. These however fail to show the degree of equality of
distributions. The median of a distribution of income would remain unchanged even if everyone
with income below the median had their income reduced by half. The mean would remain
unchanged if we were to take money from the poorest and give it to the richest.
A commonly used measure is the GINI index of relative inequality, which is related to
the Lorenz Curve. Look to the figure 7.1 on p. 151, these wonderful, wonderful graphs.
The Lorenz Curve is constructed by ranking the population by income and asking the
question: What percent of income goes to the poorest X percent? So, with percentage of income
measured on the vertical or Y axis, and the percent of the population measured on the horizontal
or X axis, the income distribution will trace out a curve from 0 (point of origin) to 100% of the
population. Now, a perfectly equal distribution would be represented by a straight line again
from 0 to 100. They call that line: Line of Perfect Equality. In reality, an imperfect distribution
of equality would lie entirely below this straight line. The GINI Index of relative inequality is
proportional to the area in a Lorenz diagram between the line of perfect equality and the Lorenz
curve or Area A. The GINI coefficient provides an attractive measure for comparing the equality
of distributions over the entire range of income.
-Categorization Issues
Indices can be used to provide measure of equality within groups. Yet distributional
analysis often deals with equality across identifiable groups defined by characteristics such as
sex, race, religion, etc. A common approach is to compare mean or median income between
groups. Income comparisons can be made between men and women, older adults and young
adults, whites to everyone else. However, one needs to be careful drawing inferences between
groups because the groups may have other defining characteristics than the one they are
categorized as. If you are comparing median household income between whites and non-whites,
a lot of other factors can complicate the comparisons such as education levels, age profiles,
location. You would need to keep those other factors in mind when comparing groups.
-“Silent Losers” Issues
A silent loser is a person who fails to voice their protest against the policy that caused
their loss. This can happen because they did not anticipate losing when the policy was adopted.
When that happens, they still fail to protest because they see no benefit from it. An example
could be the policy for rent control. It could be construed that the debate is between landlords
and current renters. But another group that could lose out are potential renters. They see no
benefit in protesting, that will not get them an apartment. They also may fail to protest because
they do not see the connection of their losses to the policy. Losers may be silent because they
have not been affected yet, like babies. Policies affecting environment may have significant
effects on the quality of life for future generations.
Instrumental Values
The ultimate goal of public policy is to advance the substantive values that define the “good
society.” Instrumental values are things we desire that allow us to obtain polices that promote
substantive values.
-Political Feasibility
The distributional consequences of policies are of fundamental concern to participants in
the political process. They tend to support policies favored by their constituents. This may lead
to distributional considerations that do not necessarily correspond to substantive values. But
even when the distributional values do not seem substantively relevant, they nevertheless may be
instrumentally relevant to political feasibility.
This chapter talked about two broad classes of rationales for public policies: the correction of
market failures to improve efficiency and the allocation of resources; and the reallocation of
opportunity and goods to achieve distributional and other values.
Chapter 7 Rationales for Public Policy
Distributional and Other Goals
Definition:
Pareto Principle –The inability to make someone better off without making someone else worse
off. Pareto Efficiency offers a way of ranking allocations of goods without making explicit
comparisons of the utilities of individuals.
Social Welfare function - Efficiency - the allocation of goods that maximizes the social welfare
function (the “greatest good” principle).
converts the utilities of all individuals into an index of social utility, provides an alternative
approach to defining economic efficiency and aggregate welfare..
Ex of Social Welfare function - three people with equal utility functions, then the allocation of
wealth that maximizes social welfare is exactly equal shares of wealth for each person.
Only when each person has exactly the same marginal utility of wealth would opportunities for
increasing the social welfare function disappear – the assumption of identical utility functions
implies that the equality of marginal utility can occur only when wealth is equal
3 Different Socially Optimal policy choices for a 3 person society (figure 7.1)
Utilitarian – simply sums the utilities of the three persons. This is a consequentialist philosophy
in that actions are to be evaluated in terms of the preferences of individuals for various
consequences, which, in turn, can be aggregated. This is simply the greatest good. This is the
foundation for cost-benefit analysis. It does not differentially weight any one’s utility, whether
rich or poor, its founders perceived it to be both egalitarian and democratic. Egalitarian in that
individuals exhibit declining marginal utility with respect for wealth which justifies some level
of redistribution from rich to poor. It is Democratic because it posits that the utility of everybody
counts. Criticism – offers weak protection for fundamental individual rights, because it does
not guarantee minimal allocations to individuals.
Rawlsian – maximizes the utility received by the person deriving the lowest utility - a maximum
principle, maximizing the minimum utility realized by anyone. This principle is highly
equalizing as it applies the greatest benefit of the least advantaged members of society. Rawls
posits the “veil of ignorance” so that people could deliberate as equals. Rawls argues that people
would unanimously exhibit risk aversion. This is in the spirit of the “social contract” of Locke
and Rousseau. Criticism - proposes extreme redistribution that reduces incentives to create
wealth.
Multiplicative - proportional to the product of the utilities of the three person. This avoids
allocations with very low levels of utility to any individuals. Individuals would much rather
have allocations that maximize average utility with some floor constraint.
Choosing Institutions versus Choosing Allocations
-
-
Constitutional design perspective focuses on the choice of the fundamental procedural
rules governing political decision making
Property rights perspective focuses on the implications of the rules governing ownership
and economic activity recognizing that they affect how much is produced as well as how
it is distributed.
Social values, norms, habits, conventions and other informal forces that influence
interaction among society members
Distinction between valuing alternative distributions and valuing alternative institutions is
relevant no matter what normative framework underlies the assessment of social welfare
Act Utilitarianism – the rightness of an act depends on the utility it produces
Rule Utilitarianism – the rightness of an act depends on its adherence to general rules or
principles that advance social utility.
Measuring Changes in Social Welfare:
Social Indicators –a variety of quantitative measures proposed to gauge changes in social
welfare when social welfare functions are impractical.
-
Gross and Net National Product – changes in social surplus provide a conceptually
attractive metric for evaluating policies in terms of efficiency. However it is often
impractical due to the widespread policies affecting the economy.
- Gross National Product (GNP) – the market value of the output of final goods
and services produced by a nation’s economy. Drawbacks as a tool –it measures
the market value of goods and services in current prices so that increases in the
general price levels inflate GNP estimates even in the absence of increase of
output. Second, it does not account for the depreciations of plants, equipment,
and residential structures that offsets the addition to productive capacity resulting
from new investment.
o Adjusting the GNP for depreciation leads to Net National Product (NNP)
o Only act as a rough estimate for changes in social welfare
-
Unemployment, inflation and the Balance of payments
o Unemployment rates have both efficiency and distributional dimensions.
 The economically efficient unemployment rate therefore may be larger
than zero to accommodate the movement of labor among jobs.
 The efficient rate may not be consistent with distributional objectives
o Rate of Inflation
 Consumer Price Index (CPI) – how much it cost in current dollars to buy a
fixed basket of market goods relative to its cost in some base year - is
commonly used to measure inflation rates


Zero rate of inflation is not necessarily desirable
CPI may overstate the rate of inflation
o Balance of Payments
 The difference of between the dollar value of goods and services exported
and the dollar value of the goods and services imported.
 Negative balance is a trade deficit
o Non –economic indicators – measure the various dimensions of social welfare.
Infant mortality rates may be used as an indicator of diet and healthcare available
to women. Others include crime rates, adult life expectancy, smog free days, and
educational achievement. These indicators need both conceptual validity and
accuracy of measurement.
-
- Substantive Values other than Efficiency
o Viewing market failure as a necessary condition for government intervention
implies that Pareto efficiency is the only appropriate social value. An argument
can be made for always including efficiency as a substantive value in policy
analysis. The example given is that only the malevolent would oppose making
someone better off without making anyone else worse off – Below are important
substantive values that compete with efficiency
-Human Dignity: Equity of Opportunity and floors of consumption
-All People have intrinsic value
- Our own dignity as human beings requires us to respect
the
dignity of others
- Without any endowments someone would effectively be barred
from participating in the market process
_ we might even find a Pareto-efficient allocation that results in the
premature death of some people.
-Might agree that viable participation in market exchange requires
some minimal endowment of assets
While transfers to ensure floors of consumption would increase the equality of the distribution of
goods in society by raising up the least wealthy, this is only a side effect of preserving human
dignity.
Increasing participation in decisions over the provision and allocation of public goods also merits
consideration as an appropriate value in the evaluation of public policies
- Increasing the Equality of Outcomes
-Minimum level should high enough to ensure commonly
recognized needs for dignified survival
-Does not explicitly depend on wealth, income, or consumption of
others in society but it is a collective assessment
-Rawlsian criticism exists in that once reallocation is anticipated
people will drastically change their behaviors and that will
generally reduce the total amount of wealth that will be available.
-Vertical equity – those with greater wealth would pay higher taxes
so that everyone gives up the same amount of utility
Horizontal equity – requires that those in similar circumstances be
treated alike

The more equal the distribution of any given level of wealth, the
higher the ranking of that distribution by the social welfare
function

-
In general we should expect the total available wealth to shrink
more, the greater amount of redistribution attempted.
Preserving Institutional Values

Whether national or sub national level constitutions provide
essential rules for organizing collective and private decision
making

Constitutions derive legitimacy from - perception of their content
provides order in a reasonable and fair way, the nature of their
establishment, ease in which people can choose alternative politics

There is social value in protecting legitimate constitutions from
threats external to the polity.

Thus policies that promote national security may be justified by a
social value other than increasing efficiency through the provision
of a public good

Voluntary compliance reduces enforcement costs – encouraged by
the perception of fairness

The Perspective of institutional utilitarianism suggests that there is
likely to be social value in preserving or strengthening important
social institutions such as family.
-Cautions in Interpreting Distributional Consequences (what is being distributed and to
whom?)

Measurement Issues

Personal income, the flow of payments to persons for use of the
input factors, such as labor, land, capital provides a conceptually
attractive measure of purchasing power. Income, which is
commonly measured deviates form purchasing power in several
important ways
o Not all wealth is full reflected in measure income
o Government tax and transfer programs alter the amount of
disposable income. Ex. Deductions and other adjustments
made to arrive at taxable income imply that taxpayers with
the same pre-tax income have very different disposable
incomes.
o Individuals consume as member of a household, however
not all members contribute income toward the consumption

Index Issues

Comparing distributions poses the problem of choosing
appropriate metrics

Ideally, we would like an index that ranks distributions according
to appropriate distributional values


However no single index can fully summarize a distribution
The median and mean fail to show the degree of equality of
distributions (the median would remain unchanged even if
everyone with income below the median had their income reduced
by half. The mean would remain unchanged if we were to take
money from the poorest and give it to the richest.

A commonly used distributional measure is the Gini Index of
relative inequality, which is related to the Lorenz Curve

A Lorenz curve is constructed by ranking the population by
income and asking: What percent of the income goes to the poorest
X percent of the population? With the percentage of income
measured on the vertical axis and the percentage of population
measured on the horizontal axis, the income distribution will trace
out a curve going for the origin to the point representing 100
percent of the income going to 100 percent of the population

The Gini coefficient provides an attractive measure of comparing
the equality of distributions over the entire range of income.

Categorization Issues

Indices can be used to provide measures of equality within groups.
Yet distributional analysis often deals with equality across
identifiable groups defined by characteristics such as sex, race,
religion, etc.. A common approach would be to compare mean or
median income between groups. Income comparisons can be made
between mean and women, older adults and young adults, whites
to everyone. However one needs to be careful drawing inferences
between groups because the groups may have other defining
characteristics than the one they are categorized as. Lots of factors
can complicate comparisons such as education levels, age profiles,
location

Silent Loser issues

Distributional analyses often fail to identify all groups affected by
policies.

Silent losers are those who fail to voice protest against the policies
causing their losses,

The fail to protest is that they unexpectedly suffered loses as
individuals (which they didn’t expect when the policy was
adopted) and feel that protest offers little prospect of personal gain.

The fail to protest because they do not connect their losses to
policy. Ex. The inefficiency caused by price controls and higher
rate of unemployment during oil price shocks

They may be silent because they have not been born. Policies may
have significant effect on future generations.
-Instrumental Values
The ultimate goal of public policy is to advance the substantive values that define
the “good society”.

Political feasibility – the distributional consequences of policies
are of fundamental concern to participants in the political process.
They tend to support policies favored by their constituents. This
may lead to distributional considerations that do not necessarily
correspond to substantive values. But even when the distributional
values do not seem substantively relevant, they nevertheless may
be instrumentally relevant to political feasibility.

Revenues and Expenditures
o Raising public revenue is generally economically and
politically costly – therefore policies involving less direct
public expenditure tend to receive greater political support
o The substantive effects of the policies are often difficult to
predict
Conclusions
This chapter talked about two broad classes of rationales for public policies: the correction of
market failures to improve efficiency and the allocation of resources; and the reallocation of
opportunity and goods to achieve distributional and other values.
Market failures and unsatisfied distributional goals are necessary but not sufficient grounds for
public intervention. We must fairly consider the costs of the proposed intervention.
Chapter 8
Limits to Public Intervention
Every society produces and allocates goods through some combination of individual and
collective choice. Most individual choice furthers such social values as efficiency and liberty.
But some individual choice can be identified as market failures and can detract from social
values in predictable ways. Collective choice exercised through government structures offers at
least the possibility for correcting the perceived deficiencies of individual choice. But just as
individual choice sometimes fails to promote social values in a predictable way, so does
collective choice. Public policy therefore should be able to understand and compromise for
market failure and for government failure as well.
Social Choice Theory: focuses on the operation of voting rules and other mechanisms of
collective choice. From this we learn of the inherent imperfectability of democracy.
Public Choice Theory: studies of organizational behavior helps to describe the problems of
implementing collective decisions in decentralized systems of government and of using public
agencies to produce and distribute goods.
These two theories basically tell us that even the best governments cannot always promote the
social good in all circumstances.
This chapter classifies government failures as problems inherent in four general features of
political systems: direct democracy, representative government, bureaucratic supply, and
decentralized government. At one extreme are the characteristics of direct democracy, which
simply warn analysts to be skeptical of claims that the results of election and referenda provide
unambiguous mandates for efficient policies. At the other extreme are the characteristics of
bureaucratic supply and decentralized government, which help analysts anticipate the problems
likely to be encountered during the implementation of public policies. Representative
government, however, can help analysts determine and improve the political feasibility of their
preferred policy alternatives.
Problems Inherent in Direct Democracy
In democracies, voting serves as the mechanism for combining the preferences of
individuals into social choices.
The Paradox of Voting
This brings into question the common interpretation of voting outcomes as the “will of the
people.” On table 8.1 on p. 158, this illustrates the paradox of voting. In order to find out which
choice the group wants more, we have to look in which place the choice is in. With regards to
school budget and spending, three different groups were asked how much spending they would
like to see in schools. In Agenda A, High v. Low in round 1. As both Moderates and Effective
Schoolers favor High over Low, High wins the vote. However, in round 2, Medium v. High,
Moderates and Fiscal Conservatives favor Medium over High. Medium then wins the whole
thing. When you compare all the choices available, each choice wins. Medium won in Agenda
A, High won in Agenda B, and Low won in Agenda C. In order to screw up policy analysts even
more, what if we allow for the possibility of opportunistic voters? Because this opportunistic
voting requires one to realize that a more favorable final outcome can sometimes be achieved by
voting against one’s true preference in the early rounds, political scientists usually call this
sophisticated voting. The final social choice would depend not only on the agenda but also on
the extent to which people engage in sophisticated voting. This is the paradox of voting.
Preference Intensity and Bundling
If a society decided every public policy question by referendum and they voted their true
preferences, social choices may result as Pareto inefficient and distributionally inequitable. A
fear in direct democracies is tyranny of the majority. The majority would constantly inflict costs
on a minority. Of course not everyone in the majority will necessarily vote according to private
interests. They may vote against the policy out of a sense of fairness or fear that it will somehow
turn around and affect them.
Majorities may inadvertently inflict high costs on minorities because voting schemes do not
allow people to express the intensity of their preference. No matter how much someone dislikes
a proposed project, he or she only gets to cast one vote against it. In fact, those in the minority
would have an incentive to overstate the intensity of their dislikes. The danger of tyranny by the
majority makes democracy by referenda generally undesirable.
Bundling refers to the numerous positions a candidate may stand for. Candidate executives
would stand for office on platforms consisting of various positions on important policy issues.
Voters must evaluate the bundle of positions. The general implication for democracy is that
whenever people must vote on a bundle of policies or positions, it is not necessarily the case that
any particular policy in the winning bundle represents the will of a majority. Even a landslide
victory may not represent a “mandate from the people.”
The paradox of voting, the possibility of minorities with intense preferences, and the problem of
bundling show the imperfection, and imperfectability, of democracy as a mechanism of social
choice. As policy analysts, we must recognize that democratic processes do not always give us a
true assessment of social values. Despite these inherent problems, direct democracy offers
several advantages. The opportunity for participation encourages citizens to learn about public
affairs. Actual participation may make citizens more willing to accept social choices that they
opposed because they had an opportunity to be heard and to vote.
Problems Inherent in Representative Government
Representatives often face the dilemma of choosing between actions that advance their
conception of the good society and actions that reflect the preferences of their constituencies.
Three factors greatly influence the way representatives actually behave. First, they have their
own private interests. They try to maximize the percentages of votes they could receive. This
requires them to pay more attention to the interests of the most responsive citizens than to those
who are either unlikely to vote or who are likely to vote according to a party, ethnicity, or other
considerations.
Second, individuals must incur costs to monitor the behavior of their representatives. Given
financial and time constraints, people usually do not find it in their private interests to articulate
policy preferences or to monitor closely the actions of their representatives. Consequently,
representatives tend to be most closely evaluated by groups that have preferences very different
from their broader constituencies: interest groups.
Third, party discipline may constrain the self interested behavior of individual representatives.
Rent Seeking: Diffuse and Concentrated Interests
Concentrated economic benefits (and diffuse economic costs) often arise when governments
intervene in markets. The interventions generally create economic benefits in the form of
rents—payments to owners of resources above those which the resources could command in any
alternative use. Lobbying for such interventions is called rent seeking.
Sometimes governments generate rents for producers by directly setting prices in markets. To
maintain the price floor, the government must take the excess supply off the market. Even the
initial beneficiaries of the market intervention may fail to realize the full rents because of the
costs of the rent-seeking activity. Rents can be realized directly from government as well as
through the marketplace.
Despite the advantages concentrated interests enjoy in mobilizing for political activity, they do
not always prevail over diffuse interests. If those with similar interests are already organized,
then they may be able to use the existing organizational structure to overcome the free-riding
problem that would keep them from expressing their interests individually. Diffuse interests may
also enjoy access to representatives by virtue of their distribution. The extent to which such
diffuse interests can become politically effective usually depends on the existence of an
organization to mobilize the contributions of individual members.
Problems of Geographic Representation: The District Based Legislature
In most countries, legislators represent geographically defined districts. While they may want
what is best for the entire country, self interest with regards to reelection dictate they pay special
attention to the interests of their districts. District oriented valuation of expenditures often leads
to adoption of policies with net social costs as legislators bargain with each other to get their
share from the “pork barrel.” Sometimes called logrolling, this involves assembling a collection
of projects that provide sufficient locally perceived benefits to gain adoption of the packages as a
whole. When coupled with representatives unwilling to bear the political costs of raising taxes,
logrolling for district “pork” contributes to deficit spending.
Shortened Time Horizons: Electoral Cycles
Representatives often must make decisions that will have consequences extending many years
into the future. For economic efficiency, the representatives should select policies for which the
present value of benefits exceeds the present value of costs. Self interest operating in an
environment of imperfect monitoring, however, increases incentives for representatives to
discount heavy costs and benefits that will not occur in the short run. Why would they do this?
One factor is the representative’s perception of his vulnerability in his reelection bid. The more
threatened he feels, the more likely he is to select projects with immediate and visible benefits
for which he can claim credit. Reps either not standing for reelection or running in “safe”
districts are likely to place less value on the short-term political gains and therefore are more
likely to act like the “statesmen.”
Posturing to Public Attention: Public Agendas, Sunk Costs, and Precedent
Candidates for public office must compete for the attention of the electorate. The media offers
opportunities for representatives to reach the public. When the news media draws public
attention to some undesirable social condition, representatives will be able to share the limelight
by proposing changes in public policy. Representatives and analysts that prefer a specific policy
may have to wait for an appropriate condition to arise to gain a “policy window.” A policy
agenda strongly influenced by the pattern of media coverage and political advertising is not
necessarily consistent with the concept of public policy as a rational search for ways to improve
social welfare. A media-driven policy agenda discourages the careful evaluation of alternatives.
Whether or not representatives are attempting to exploit policy windows, they seek to put their
actions and positions in a favorable light. Politicians and economists often view sunk costs
differently. An economist views resources committed to a project in the past and no longer
available for other uses as “sunk” when deciding to either continue or terminate the project. A
politician who advocated the project initially may be adamant against terminating the project for
fear that opponents will point to abandonment as an admission of a mistake.
Precedents often provide opportunities for representatives to gain favorable public reactions to
their proposals. By pointing to apparently similar policies adopted in the past, representatives
can appeal to people’s sense of fairness.
Problems Inherent in Bureaucratic Supply
Governments often create publicly funded organizations to deal with perceived market failures.
Agency Loss
The monitoring problem is not unique to public agencies. For example, employees generally
want their firms to do well, but they also like doing things like reading the newspaper on the job.
Managers must expend time, effort, and goodwill to keep such “shirking” under control. The
managers face the task of creating organizational arrangements that minimize the sum of the
costs of the undesirable behavior of employees and of the activity undertaken to control it.
These costs, which are measured relative to a world with perfect information, are referred to as
agency loss. Agency loss is inherent in all organizations, whether private or public. Three
factors, however, typically make agency loss a relatively more serious problem for public
bureaus than for privately owned firms. First is the difficulty of valuing public outputs, and
therefore, performance. Second is the lack of competition among bureaus; and lastly is the
inflexibility of civil service systems.
The Necessity to Impute the Value of Output
In the absence of market failures, the marginal social value of the output of a competitive firm
equals market price. Most public agencies, however, do not sell their output competitively.
Representatives thus face the problem of having to impute values to such goods as national
security, law and order, and health and safety. Often distributional goals further complicate the
valuation problem. Public agencies are often expected to distribute their output in accordance
with principles such as horizontal and vertical equity. Crime reduction might be thought of as
the major output of a police department. At the same time, however, the distribution of crime
reduction across neighborhoods is also important. The valuation of outputs when goals are
multiple and conflicting requires consensus with respect of one goal to another. Such consensus
is rare.
Effects of Limited Competition on Efficiency
Competition forces private firms to produce output at minimum cost. Firms that do not use
resources in the most efficient manner are eventually driven from the market by firms that do.
Because public agencies do not face direct competition, the can survive even when they operate
inefficiently. Usually public agencies have weaker incentives to innovate than private firms.
Profit usually provides a strong incentive for firms to find new production methods that will cut
costs. When one firm in an industry successfully innovates, others must follow suit in order to
stay alive in the industry. Public agencies are generally neither driven to extinction nor capable
of fully capturing external benefits if they choose not to innovate. Public agencies who do wish
to innovate still face several disadvantages. They have no competitors to imitate. The absence
of competition raises the possibility that public agencies can survive even if they fail to operate
efficiently. Whether inefficiency actually results or not depends on the system of incentives that
budgetary sponsors actually impose on public executives.
Ex Ante Controls: Inflexibility Caused by Civil Service Protections
Agency heads often cannot make expenditures outside of narrow budgetary categories. Civil
service rules place especially severe restrictions on how agency heads hire, fire, reward, and
punish employees. The modern civil service provides career opportunities within public
agencies. The majority of government employees belong to the civil service which in theory
determines their employment tenure and salary independent of political parties. This separation
helps to insulate against attempts to use agencies for partisan purposes. Nonpartisanship
however must be purchased at the expense of a certain amount of flexibility in agency staffing.
The same rules that make it difficult to fire employees for political purposes make it difficult to
weed out the incompetent and unproductive. Fixed pay schedules which provide less
opportunity for undue political leverage over employees, tend to under reward the most
productive and over reward the least productive. As the former leave for higher paying jobs in
the private sector, the agencies are left with a higher proportion of the latter.
Bureaucratic Failure as Market Failure
We have already discussed how monitoring costs and limited competition lie at the heart of
bureaucratic failure; but bureaucratic failure often manifests itself as public good and externality
problems.
Organizational public goods: The ex ante rules generally imposed on public organizations to
compensate for lack of competition contribute to agency costs throughout the hierarchy. We can
think of organizational public goods problems as a particular manifestation of agency costs.
Organizational externalities: Production externalities result when organizations do not see the
full social marginal costs and benefits of their actions. For example, courts pay less than market
price for the time of people on jury panels. We expect them to overuse jurors’ times relative to
other inputs, such as paid employees, to facilitate the efficient use of jurors.
Problems Inherent in Decentralization
Decentralization has its benefits. Distribution of authority among branches of government
provides a system of checks and balances. It reduces the likelihood of tyranny of the majority.
Assigning different functions to different levels of government facilitates both the production of
public goods at efficient levels and the matching of local public goods to public preferences.
These highly desirable benefits do come at a price. Decentralization tends to hinder
implementation of policies. It also allows for fiscal externalities to occur in association with
supply of local public goods.
The Implementation Problem
The essence of the implementation problem lies in the distribution of necessary elements. The
greater the potential for either persons or organizations to withhold necessary contributions, the
greater is the possibility of failure. In decentralized political systems, many officials have the
capability to withhold contributions.
The problem of inter-organizational cooperation also arises when central government must rely
on lower levels of government for contributions. For example, the central government may have
the constitutional authority to order local school districts to end racial segregation. Systematic
monitoring of compliance may require extensive investigations due to the large number of
jurisdictions involved. Implementations of policies requiring cooperation from lower level
governments become even more difficult when the central government does not have the
authority to coerce.
Fiscal Externalities
Decentralization permits the provision of local public goods to be better matched to local
demands; however a problem arises with inequitable distribution of local public goods. For
example, immigrants who pay below-average tax shares and place above-average demands on
public services are particularly undesirable because they impart a negative fiscal externality to
established residents.
Governments, like markets, sometimes fail to promote the social good. We cannot always
accurately predict the exact consequences of government failures. We must understand,
however, that they can occur if we are to avoid the most ineffective and unwise interferences
with private choices.
Chapter 8
Limits to Public Intervention
Every society produces and allocates goods through some combination of individual and
collective choice. Most individual choice furthers such social values as efficiency and liberty.
But some individual choice can be identified as market failures and can detract from social
values in predictable ways. Collective choice exercised through government structures offers at
least the possibility for correcting the perceived deficiencies of individual choice. But just as
individual choice sometimes fails to promote social values in a predictable way, so does
collective choice. Public policy, therefore, should be informed of both market failure and
government failure.
Social Choice Theory: focuses on the operation of voting rules and other mechanisms of
collective choice. From this we learn of the inherent imperfectability of democracy.
Public Choice Theory: studies of organizational behavior helps to describe the problems of
implementing collective decisions in decentralized systems of government and of using public
agencies to produce and distribute goods.
These two theories, along with a variety of fields in political science where we learn the
problems of representative government, basically tell us that even the best governments cannot
always promote the social good in all circumstances.
This chapter classifies government failures as problems inherent in four general features of
political systems: direct democracy, representative government, bureaucratic supply, and
decentralized government. At one extreme are the characteristics of direct democracy, which
simply warn analysts to be skeptical of claims that the results of election and referenda provide
unambiguous mandates for efficient policies. At the other extreme are the characteristics of
bureaucratic supply and decentralized government, which help analysts anticipate the problems
likely to be encountered during the implementation of public policies. Representative
government, however, can help analysts determine and improve the political feasibility of their
preferred policy alternatives.
Problems Inherent in Direct Democracy
In democracies, voting serves as the mechanism for combining the preferences of
individuals into social choices. As we will see, no method of voting is both fair and coherent
at the same time
The Paradox of Voting
This brings into question the common interpretation of voting outcomes as the “will of the
people.” On table 8.1 on p. 158, this illustrates the paradox of voting of a school board as it
proposes to base the budget size on the results of pairwise voting among 3 possible outcomes. In
order to find out which choice the group wants more, we have to look in which place the choice
is in. With regards to school budget and spending, three different groups were asked how much
spending they would like to see in schools. In Agenda A, High v. Low in round 1. As both
Moderates and Effective Schoolers favor High over Low, High wins the vote. However, in round
2, Medium v. High, Moderates and Fiscal Conservatives favor Medium over High. Medium then
wins the whole thing. When you compare all the choices available, each choice wins. Medium
won in Agenda A, High won in Agenda B, and Low won in Agenda C.
Kenneth Arrow’s General Possibility Theorem proved that any voting rule that satisfies a
basic set of fairness conditions may produce illogical results as seen above. The conditions
include:
1. Axiom of unrestricted domain – each person is allowed to have any transitive preferences over
the possible outcomes. Transitivity – if A is preferred to B, B is preferred to C, then A is preferred
to C.
2. Axiom of Pareto choice – if one alternative is unanimously preferred to a second, then the rule
of choice will not select the second.
3. Axiom of independence – the ranking of any two alternatives should not depend on what
alternatives are available. If A is preferred to B, the introduction of C will not change A’s position
over B.
4. Axiom of non-dictatorship – the rule must not allow any one person dictatorial power to impose
his or her preferences regardless of the preferences of others.
In order to screw up policy analysts even more, what if we allow for the possibility of
opportunistic voters? Because this opportunistic voting requires one to realize that a more
favorable final outcome can sometimes be achieved by voting against one’s true preference in
the early rounds, political scientists usually call this sophisticated voting. The final social choice
would depend not only on the agenda but also on the extent to which people engage in
sophisticated voting (when you vote against your preference in the preliminary rounds to achieve
a more favorable outcome). This is the paradox of voting.
Preference Intensity and Bundling
If a society decided every public policy question by referendum and they voted their true
preferences, social choices may result as Pareto inefficient and distributionally inequitable. A
fear in direct democracies is tyranny of the majority. The majority would constantly inflict costs
on a minority. Of course not everyone in the majority will necessarily vote according to private
interests. They may vote against the policy out of a sense of fairness or fear that it will somehow
turn around and affect them.
Majorities may inadvertently inflict high costs on minorities because voting schemes do not
allow people to express the intensity of their preference. No matter how much someone
dislikes a proposed project, he or she only gets to cast one vote against it. In fact, those in the
minority would have an incentive to overstate the intensity of their dislikes. The danger of
tyranny by the majority makes democracy by referenda generally undesirable.
Bundling refers to the numerous positions a candidate may stand for. Candidate executives
would stand for office on platforms consisting of various positions on important policy issues.
Voters must evaluate the bundle of positions. The general implication for democracy is that
whenever people must vote on a bundle of policies or positions, it is not necessarily the case that
any particular policy in the winning bundle represents the will of a majority. Even a landslide
victory may not represent a “mandate from the people.” A candidate holding the minority
position on every important issue may still win the election.
The paradox of voting, the possibility of minorities with intense preferences, and the problem of
bundling show the imperfection, and imperfectability, of democracy as a mechanism of social
choice. As policy analysts, we must recognize that democratic processes do not always give us a
true assessment of social values. Despite these inherent problems, direct democracy offers
several advantages. The opportunity for participation encourages citizens to learn about public
affairs. Actual participation may make citizens more willing to accept social choices that they
opposed because they had an opportunity to be heard and to vote.
Problems Inherent in Representative Government
Representatives often face the dilemma of choosing between actions that advance their
conception of the good society and actions that reflect the preferences of their constituencies.
All 3 branches of government make policy. Three factors greatly influence the way
representatives actually behave.
1. First, they have their own private interests. They try to maximize the percentages of
votes they could receive. This requires them to pay more attention to the interests of the
most responsive citizens than to those who are either unlikely to vote or who are likely to
vote according to a party, ethnicity, or other considerations.
2. Second, individuals must incur costs to monitor the behavior of their representatives.
Given financial and time constraints, people usually do not find it in their private interests
to articulate policy preferences or to monitor closely the actions of their representatives.
Consequently, representatives tend to be most closely evaluated by groups that have
preferences very different from their broader constituencies: interest groups.
3. Third, party discipline may constrain the self interested behavior of individual
representatives.
The following show some of the general tendencies of self interested representatives who are not
fully monitored by their constituencies.
Rent Seeking: Diffuse and Concentrated Interests
Concentrated economic benefits (and diffuse economic costs) often arise when governments
intervene in markets. The interventions generally create economic benefits in the form of
rents—payments to owners of resources above those which the resources could command in any
alternative use. Lobbying for such interventions is called rent seeking.
Sometimes governments generate rents for producers by directly setting prices in markets. To
maintain the price floor, the government must take the excess supply off the market. Even the
initial beneficiaries of the market intervention may fail to realize the full rents because of the
costs of the rent-seeking activity (direct lobbying and campaign contributions) which is called
rent dissipation. Rents can be realized directly from government as well as through the
marketplace such as outright grants, regulations, and taxes.
Despite the advantages concentrated interests enjoy in mobilizing for political activity, they do
not always prevail over diffuse interests. If those with similar interests are already organized,
then they may be able to use the existing organizational structure to overcome the free-riding
problem that would keep them from expressing their interests individually, such as the NRA.
Diffuse interests may also enjoy access to representatives by virtue of their distribution; such as
the National Education Society, which is spread fairly evenly across congressional lines. The
extent to which such diffuse interests can become politically effective usually depends on the
existence of an organization to mobilize the contributions of individual members. Sometimes,
however, the mobilization of diffuse interests facilitates rent seeking, as in price ceiling, pg. 171.
Problems of Geographic Representation: The District Based Legislature
In most countries, legislators represent geographically defined districts. While they may want
what is best for the entire country, self interest with regards to reelection dictate they pay special
attention to the interests of their districts. District oriented valuation of expenditures often leads
to adoption of policies with net social costs as legislators bargain with each other to get their
share from the “pork barrel.” Sometimes called logrolling, this involves assembling a collection
of projects that provide sufficient locally perceived benefits to gain adoption of the packages as a
whole. When coupled with representatives unwilling to bear the political costs of raising taxes,
logrolling for district “pork” contributes to deficit spending. The tendency of policies to spread
perceived benefits over a majority of districts may make targeting and policy experimentation
difficult.
Shortened Time Horizons: Electoral Cycles
Representatives often must make decisions that will have consequences extending many years
into the future. For economic efficiency, the representatives should select policies for which the
present value of benefits exceeds the present value of costs. Self interest operating in an
environment of imperfect monitoring, however, increases incentives for representatives to
discount heavy costs and benefits that will not occur in the short run. Why would they do this?
One factor is the representative’s perception of his vulnerability in his reelection bid. The more
threatened he feels, the more likely he is to select projects with immediate and visible benefits
for which he can claim credit (project A over project B). Reps either not standing for reelection
or running in “safe” districts are likely to place less value on the short-term political gains and
therefore are more likely to act like the “statesmen.” A problem that arises is that opponents can
point to yet unrealized future costs.
Posturing to Public Attention: Public Agendas, Sunk Costs, and Precedent
Candidates for public office must compete for the attention of the electorate. The media offers
opportunities for representatives to reach the public. When the news media draws public
attention to some undesirable social condition, representatives will be able to share the limelight
by proposing changes in public policy. The attempts to convert undesirable and highly visible
conditions to public policy problems help determine the policy agenda. Representatives and
analysts that prefer a specific policy may have to wait for an appropriate condition to arise to
gain a “policy window.” A policy agenda strongly influenced by the pattern of media coverage
and political advertising is not necessarily consistent with the concept of public policy as a
rational search for ways to improve social welfare. A media-driven policy agenda discourages
the careful evaluation of alternatives.
Whether or not representatives are attempting to exploit policy windows, they seek to put their
actions and positions in a favorable light. Politicians and economists often view sunk costs
differently. Economists view resources committed to a project in the past and no longer available
for other uses as “sunk” when deciding to either continue or terminate the project. A politician
who advocated the project initially may be adamant against terminating the project for fear that
opponents will point to abandonment as an admission of a mistake.
Precedents often provide opportunities for representatives to gain favorable public reactions to
their proposals. By pointing to apparently similar policies adopted in the past, representatives
can appeal to people’s sense of fairness.
Problems Inherent in Bureaucratic Supply
Governments often create publicly funded organizations to deal with perceived market failures.
Agency Loss
The monitoring problem is not unique to public agencies. For example, employees generally
want their firms to do well, but they also like doing things like reading the newspaper on the job.
Managers must expend time, effort, and goodwill to keep such “shirking” under control. The
managers face the task of creating organizational arrangements that minimize the sum of the
costs of the undesirable behavior of employees and of the activity undertaken to control it.
These costs, which are measured relative to a world with perfect information, are referred to as
agency loss. Agency loss is inherent in all organizations, whether private or public. Three
factors, however, typically make agency loss a relatively more serious problem for public
bureaus than for privately owned firms. First is the difficulty of valuing public outputs, and
therefore, performance. Second is the lack of competition among bureaus; and lastly is the
inflexibility of civil service systems.
Discretionary Budget refers to the difference between the budget and the minimum cost of
producing the output level that will satisfy the sponsor. Private firms keep the discretionary
budget as profit while public firms spend to get to the budget.
The Necessity to Impute the Value of Output
In the absence of market failures, the marginal social value of the output of a competitive firm
equals market price. Most public agencies, however, do not sell their output competitively.
Representatives thus face the problem of having to impute values to such goods as national
security, law and order, and health and safety, which make it difficult t determine optimal sizes.
Often distributional goals further complicate the valuation problem. Public agencies are often
expected to distribute their output in accordance with principles such as horizontal and vertical
equity. Crime reduction might be thought of as the major output of a police department. At the
same time, however, the distribution of crime reduction across neighborhoods is also important.
The valuation of outputs when goals are multiple and conflicting requires consensus with respect
of one goal to another. Such consensus is rare.
Effects of Limited Competition on Efficiency
Competition forces private firms to produce output at minimum cost. Firms that do not use
resources in the most efficient manner are eventually driven from the market by firms that do.
Because public agencies do not face direct competition, the can survive even when they operate
inefficiently. Usually public agencies have weaker incentives to innovate than private firms.
Profit usually provides a strong incentive for firms to find new production methods that will cut
costs. When one firm in an industry successfully innovates, others must follow suit in order to
stay alive in the industry. Public agencies are generally neither driven to extinction nor capable
of fully capturing external benefits if they choose not to innovate. Public agencies who do wish
to innovate still face several disadvantages. They have no competitors to imitate. The absence
of competition raises the possibility that public agencies can survive even if they fail to operate
efficiently. Whether inefficiency actually results or not depends on the system of incentives that
budgetary sponsors actually impose on public executives.
Ex Ante Controls: Inflexibility Caused by Civil Service Protections
Agency heads often cannot make expenditures outside of narrow budgetary categories. Civil
service rules place especially severe restrictions on how agency heads hire, fire, reward, and
punish employees. The modern civil service provides career opportunities within public
agencies. The majority of government employees belong to the civil service which in theory
determines their employment tenure and salary independent of political parties. This separation
helps to insulate against attempts to use agencies for partisan purposes. Nonpartisanship
however must be purchased at the expense of a certain amount of flexibility in agency staffing.
The same rules that make it difficult to fire employees for political purposes make it difficult to
weed out the incompetent and unproductive. Fixed pay schedules which provide less
opportunity for undue political leverage over employees, tend to under reward the most
productive and over reward the least productive. As the former leave for higher paying jobs in
the private sector, the agencies are left with a higher proportion of the latter.
Because agencies enjoy monopoly status, consumers cannot show displeasure by selecting
another supplier.
Bureaucratic Failure as Market Failure
We have already discussed how monitoring costs and limited competition lie at the heart of
bureaucratic failure; but bureaucratic failure often manifests itself as public good and externality
problems.
Organizational public goods: The ex ante rules generally imposed on public organizations to
compensate for lack of competition contribute to agency costs throughout the hierarchy. We can
think of organizational public goods problems as a particular manifestation of agency costs.
In public organizations, it is difficult for executives to match individual rewards to organizational
contributions unlike private organizations, such as company reputation.
Open access resources may result in overconsumption or equipment and supplies.
Organizational externalities: Production externalities result when organizations do not see the
full social marginal costs and benefits of their actions. For example, courts pay less than market
price for the time of people on jury panels. We expect them to overuse jurors’ times relative to
other inputs, such as paid employees, to facilitate the efficient use of jurors.
Public organizations are usually exempt by law from torts by those who suffered damage.
Problems Inherent in Decentralization
Decentralization has its benefits. Distribution of authority among branches of government
provides a system of checks and balances. It reduces the likelihood of tyranny of the majority.
Assigning different functions to different levels of government facilitates both the production of
public goods at efficient levels and the matching of local public goods to public preferences.
These highly desirable benefits do come at a price. Decentralization tends to hinder
implementation of policies. It also allows for fiscal externalities to occur in association with
supply of local public goods.
The Implementation Problem
The essence of the implementation problem lies in the distribution of necessary elements
(essential policy elements). The greater the potential for either persons or organizations to
withhold necessary contributions, the greater is the possibility of failure. In decentralized
political systems, many officials have the capability to withhold contributions if they don’t agree
with the goals of the policy or if it is not sufficiently beneficial to justify own costs.
The problem of inter-organizational cooperation also arises when central government must rely
on lower levels of government for contributions. For example, the central government may have
the constitutional authority to order local school districts to end racial segregation. Systematic
monitoring of compliance may require extensive investigations due to the large number of
jurisdictions involved. Implementations of policies requiring cooperation from lower level
governments become even more difficult when the central government does not have the
authority to coerce. The central government must offer sufficient rewards to induce cooperation.
Fiscal Externalities
Decentralization permits the provision of local public goods to be better matched to local
demands; however a problem arises with inequitable distribution of local public goods. For
example, immigrants who pay below-average tax shares and place above-average demands on
public services are particularly undesirable because they impart a negative fiscal externality to
established residents.
Governments, like markets, sometimes fail to promote the social good. We cannot always
accurately predict the exact consequences of government failures. We must understand,
however, that they can occur if we are to avoid the most ineffective and unwise interferences
with private choices.
Chapter 9: Regulation of the Madison Taxi Market
This chapter is informative from four perspectives:




Describes real-world politics that affect policy creation
Provides differing expert interpretations of alleged anti-trust violations
Discusses the theories of market and government failure
Provides an example of an incomplete policy analysis
Government Failure in the Taxi Industry
In the 1990’s, taxi service in Madison, Wisconsin, a city of approximately 200,000, was among
the most expensive in the nation. Madison’s fares were unregulated, and when compared with
other cities with unregulated fares, Madison’s fares were 25% higher. When compared strictly to
cities with unregulated fares and similar population sizes, Madison’s fares were 38% higher than
the average. Madison’s comparable taxicab fare was 34% higher than the national average. No
competing taxi companies had entered Madison’s market in more than seventeen years.
The Beginning
Attention became focused on taxi regulation in Madison an editorial appeared in The Capital
Times (August 4, 1999) which attacked the city’s licensing process1.
The Mayor’s Task Force on Race Relations
As a result, the Mayor’s Task Force on Race Relations recommended that “The Mayor, Common
Council and Transit and Parking Commission study the merits of taxi deregulation2.” The Task
Force noted “Madison’s current taxi regulations are seen by some to create barriers to
competition for low-income and for minority entrepreneurs who may have limited access to
start-up capital. Deregulating Madison’s taxicab industry could provide new business
opportunities for low-income and minority entrepreneurs.” High entry costs limited the
participation of low-income residents and minorities in the taxi industry. The 24/7 rule made it
impossible for individuals to operate single-cab companies.
The Subcommittee
In November 1999, a resolution was adopted by the Common Council to set up a subcommittee
of the Transit and Parking Commission to explore deregulation3. This was endorsed by the
Transit and Parking Commission. The subcommittee was to be made up of:
1
Madison's Taxi Regulations Stifle Innovation, Competition. Samuel R. Staley, Ph.D. The Capital Times,
August 4, 1999.
2
See www.ci.madison.wi.us/council/ccattach/att1017/tranpark.pdf
3
Resolution # 56755










Two representatives of the Transit and Parking Commission
A taxicab user
Representatives from the 3 taxicab companies doing business in Madison,
Two advocates of a more open taxicab market
A representative of people with disabilities
A representative from the visitor industry
A representative from the business community
A representative of the Madison Metropolitan School District
A representative of the Dane County Department of Human Services
A University of Wisconsin representative
The subcommittee was asked to submit its findings to the Transit and Parking Commission and
the Equal Employment Opportunities Commission by September 30, 2000. The subcommittee
met thirteen times on weekday evenings to discuss this issue and to develop recommendations.
Numerous speakers, issue papers, phone interviews, e-mails, faxes and phone calls were used to
gather information about taxicab deregulation. Various persons appeared informally and gave
their views to the subcommittee.
The EOC presented a statement that favored deregulation. Some members of the subcommittee
conducted a taxicab driver survey. Drivers held nine to one that the 24-hour service requirement
should be retained. Samuel R. Staley, Director of the Urban Futures Program, prepared a general
critique of Madison’s regulatory framework for taxicabs4.
Professor Carstensen and Wisconsin’s Anti-Trust Laws
Peter Carstensen, a professor of law at the University of Wisconsin, testified that the local
regulations may violate provisions of the state’s antitrust laws, because, among other things, the
city used regulations more intrusive than necessary to accomplish legislative goals5 Moreover,
4
See Samuel R. Staley, “Toward a 21st Century Taxicab Regulatory Framework: The Case of Madison,” report
submitted to the Ad Hoc Subcommittee on Taxicab Deregulation, June 5, 2000, available at
http://www.urbanfutures.org.
5
For his complete statement, see Peter Carstensen, “Madison’s Current and Proposed Taxi Regulation: Bad Public
Policy and an Open Invitation to Litigation,” statement before the Madison Transit and Parking Commission,
September 12, 2000, http://www.taxi-l.org/papers.htm#deregulation.
attorney’s representing a city resident were concurrently preparing an anti-trust case against the
city. This case calls into question whether city regulations have created a de facto taxi cartel.
The City Attorney’s Response
The City Attorney responded to this issue as follows:
Cities are permitted by Wisconsin Statutes to regulate taxicabs and taxicab operators in the
interest of public safety. In addition, the "home rule" statute grants city councils broad powers to
"act for the government and good order of the city.” At the same time, such regulations are not
exempt from the Wisconsin antitrust law, however, "only unreasonable restraints of trade are
prohibited."
Are Madison's current taxicab regulations anti-competitive? They do not regulate rates charged,
except that they require rates to be filed with the City Clerk and they require notice and a waiting
period before rate changes. They do not limit territories and they do not limit the number of
companies or the number of vehicles. They do impose safety, insurance, and service
requirements. I maintain that the Mayor and Council have the right to impose these regulations if
they reasonably believe such regulations benefit the citizens of Madison.
Prof. Carstensen claims that the requirement that taxis serve every part of the city and provide
24-hour service limits entry into the taxi business that alone does not constitute a prohibited
restraint of trade. Entry into any business is limited by start-up costs and start-up costs may be
imposed by legitimate regulations. For example, restaurants are not permitted to open if they do
not have the equipment required to serve food safely. No one can claim that such safety
requirements are anti-competitive, even though they do require an investment that many people
would not be able to afford. Such regulations may limit entry, but they are not the kind of
regulations which constitute an antitrust or antimonopoly violation.
The City Attorney and staff have the greatest respect for Prof. Carstensen and the assistance he
has offered on this issue. I must respectfully disagree with his legal conclusion. We can never
promise that litigation will not take place, and we can never promise with certainty what its
outcome will be. In this case, however, the threat is not of the kind that should impose the
demanded limit on the Council's decision-making. I recommend that the Mayor and Council
decide this as they decide other policy issues, based on their considered judgment as to what is
best for the citizens of Madison. Respectfully submitted, Eunice Gibson City Attorney
The Council Decision
The final report, issued in August 2000, recommended the elimination of a relatively minor
regulation and kept intact other rules that made single-car companies a practical impossibility.
The council followed these recommendations.



Retain the twenty-four hour, 7 days per week service requirement.
Retain the citywide service requirement.
Eliminate the public hearing requirement for applicants of a taxicab license.



Lower the operating license applicant fee from the present $1500 to $1000.
Eliminate the need to prove public convenience and necessity to obtain a license.
Retain the 12 hour continuous driving limit.
The Textbook Policy Analysis: Efficiency, Equity, Fiscal Effects, and Political Feasibility
The policy analysis argues that the primary reason for high fares was that city regulations
restricted entry to the market. It recommends removing the 24/7 rule.\
Safety: The city argued that the licensing process ensured taxi safety. It was counter argued that
legislation and inspections should control safety, not a licensing process.
Efficiency: It concludes that since fares are not competitive, an increase in the number of taxis
would result in a decrease in fares. The analysis fails to mention that there are documented
instances in the U.S. where deregulation resulted in fare increases.
Equity: Removal of the rule would increase equity-of-access for potential operators but not
substantially change equity-of-access to service by customers. However, the counter argument of
distributional equity (cross-subsidation) was presented by the council.
Fiscal Effects: License fee revenue would increase, although removal of the rule would probably
result in somewhat higher net costs to the city.
Political Feasibility: Cab companies as well as the independent political party Progressive Dane
actively lobby the Council to protect current drivers. (Members of the Council belong to the
Progressive Dane Party). Consequently, a council majority opposed elimination of 24/7.
Members of the taxi companies were on the subcommittee. Anti-trust litigation may result in
forced deregulation.
************************************************************************
Market and Government Failure in the Taxi Industry
Information Asymmetry: In the taxi cruising market, users are not in a position to compare
rates, safety, service, etc. Not applicable to Madison 24/7 issue.
Network Externalities:
Efficiency is Central to Policy Analysis
-----------------------------------------------------------------------------------------------------
Chapter 9 – Policy Problems as Market and Government Failure:
The Madison Taxicab Policy Analysis Example
Chapter 9 provides an example of how policy analysis can bring together theories of market and
government failure, more specifically, to show how public policies to correct several market
failures actually became barriers to entry by new taxi companies.
Regulations of the Madison Taxi Market
In 1990, the taxicab fare of $9.50 in Madison Wisconsin was among the highest in the nation, 34
percent higher than the national average. Their fares were unregulated and when compared with
other cities with unregulated fees, Madison’s fares were 25 percent higher and approximately $2
more than the average for cities without fare regulation. The rates were high due to the fact that
the city’s taxi regulations restricted entry of new companies to the taxi market; therefore,
preventing changes that could benefit consumers and other entrepreneurs.
An Ad Hoc Subcommittee on Taxicab Deregulation was formed by the Common Council. This
was in response to public outcry after an editorial in The Capital Times criticized the city’s
licensing process, noting that “deregulation of Madison’s market would encourage
entrepreneurship and create jobs for low-income and minority residents.”
A policy analysis – “based on the goal of equity, efficiency, fiscal effects on municipal
government and political feasibility” - was conducted of:

Madison’s taxi market structure

The taxi operators

Madison’s municipal regulations

The current policy

Removal of the 24/7 rule
The subcommittee found that some policies were not achieving city goals and should be
rescinded. After the report was released in August 2000, the Common Council made the
following changes to their municipal regulations:

Eliminated the need prove public convenience and necessity

Lowered the initial licensing fee from $1500 to $1000

Eliminated public hearings for new licensing
The Relationship Between Market and Government Failures
When deciding whether there is a market failure, determine first whether the situation to be
analyzed involved an operational market – where prices are legally permitted. However, “where
prices are not legally permitted, start with the assumption that the market is not operational” (p.
206). In this case, government intervention is warranted. Failure of government to intervene is
known as passive government failure.
Chapter 10: Correcting Market and Government Failure: Generic Policies
Generic policies are those courses of action that, given the alternative courses of action
available, are meant to address government and market failures in a broad context. With this
approach, we have to keep in mind that policy analysis is conducted in an incremental manner
with no one generic policy as the end all explanation for the problem.
In discussing generic policies, the authors break the approaches up into five different
categories.
1.
2.
3.
4.
5.
The process of freeing, facilitating, and simulating markets.
Using taxes and subsidies to alter incentives.
Establishing rules.
Supplying goods through non-market mechanisms.
Providing economic protection
Freeing, Facilitating, and Simulating Markets
Government actions can be performed to free, facilitate, or simulate markets and promote
a system of efficient allocation of goods.
Freeing Markets
Policy actions that can be taken to free up markets or simulate their actions in three
different ways.
1.
Deregulation. This is the removal or revision of government policies that prevent the
market from working fairly or efficiently.
2. Legalization. This is the removal of legal penalties from the market with respect to
certain actions and services that can be performed. It can be due to the government
pursuing tax revenues from the activities, a change in social attitudes, or the
ineffectiveness of the law (ex. Prohibition)
3. Privatization. Government allowing private organizations to take over the operation
some of its enterprises or relaxing restrictions that prevent competition between
government and privately owned activities.
Facilitating Markets
Government actions can also assist in the creation of a market, if it does not exist, in two
ways.
1.
The establishment of property rights to goods to determine how and when goods
belong to consumers.
2. The establishment of intermediary goods that allow for the transfer of rights for nontangible goods. (ex. Emission rates in the Kyoto agreement of 1997)
Simulating Markets
A way to simulate a market is through the use of auctions in the provision of goods that
come from monopoly sources. This would force the winner of the auction to pay at or near the
expected excess returns its monopoly would generate. They would also have to price their
products or services at the lowest retail price.
Given the complexity of the outcomes and requirements of the auction, constant
monitoring and even traditional regulation may need to be employed to ensure a relatively
competitive situation.
Auctions can also be used to allocate the rights to what may be non-tangible goods in a
fair manner for all bidders. Problems can arise when there is collusion between bidders to obtain
a lower price.
Subsidies and Taxes Used to Alter Incentives
This approach is used to influence behavior to address market failure.
Supply-side taxes can be issued to those who produce goods and services in two broad ways.
1.
Output taxes. These are taxes placed on goods that exhibit externalities that
negatively affect marginal social costs. They force firms and consumers in a free
market to determine how much of the good will be produced to limit the amount of
taxes and prices paid.
a. Problems can arise due to information asymmetry on the part of the
government and the degree of taxation that may be required to address the
externality problem. It may require a period of trial and error to determine the
right amount of taxation, resulting in increased costs to implement and
monitor the process.
b. Problems aside, if the taxation is effective, it can stimulate firms to lower
their costs, innovate and gain knowledge, minimize government intrusion, and
minimize administrative complexity.
2.
Tariffs. A tax imposed in foreign imports either as a percentage of the price or a
fixed amount. This approach is usually undertaken to protect the health of domestic
industries from more productive or monopolistic international industries. But, it can
also be pursued due to other factors such as values or retribution.
a. This approach is decreasing as nations pursue trade agreements under
organizations such as the General Agreement on Tariffs and Trade (GATT)
and its successor, the World Trade Organization (WTO)
Supply-side Subsidies can be used to stimulate the production of goods and services in two ways.
1. Matching Grants. This approach consists of government payment to firms for needed
goods. An example of how this works is shown on Page 225.
a. Point B/Px on the X-axis is the original production point for a firm if it were
to consume only good-X. Point B/(Px-S) is the effect of a government
subsidy which, effectively, decreases the price of manufacturing good-X and
allows for more of it to be produced and consumed.
i. This allows consumers to move from indifference curve Io, consuming
Xo of good X and bo of all other goods, to indifference curve I1,
consuming more of both good X and all other goods.
b. In relatively similar fashion, subsidies can also subsidize part of the
consumption, force producers to eliminate externalities to their production,
force them to innovate to compensate for tax burdens subsidies can generate.
2. Tax Expenditures can be utilized to allow for market stimulation by allowing firms
and individuals to exclude certain expenditures from their incomes.
a. One example of firms taking advantage of this route is through the research
and development of new technologies and techniques.
i. Some of the problems of R&D is the lack of incentives to pursue some
kinds of R&D if there is no exclusive or significant profit from the
research or if its pursuit is believed to be too risky for the firm.
Demand-side Subsidies are aimed at stimulating consumption of final goods on the consumer
side of the market.
1. In-Kind Subsidies and Vouchers. In-Kind subsidies are provided to individuals
who meet certain need criteria and are used to provide for a range of goods
through the use of vouchers. The range of products can range from food stamps
to school choice.
a. Some of the drawbacks of this approach is the formation of a black market
for vouchers in exchange for cash that may be used for other goods.
2. Tax Expenditures. In this context, this approach is used to stimulate demand for
goods or the funding of non-profit agencies. An example of this would be Social
Security payouts.
a. A criticism of this approach would be an inequitable distribution of the
subsidy to those who hitch a free-ride without contributing to the subsidy.
Demand-side Taxes can come in two forms as ways to internalize externalities that may arise
from the use of certain goods or services.
1.
Commodity Taxes. These are taxes placed on goods whose use can have negative
effects, such as a tax on cigarettes.
2. User Fees. These are fees that are in place to charge for the use of public goods
during congested periods.
Establishing Rules
Frameworks
A factor that influences where a market will arise will be due to the framework of the
lawmaking, governing, and prosecuting body. This is the environment where it will thrive and if
proper protections are not set up, such as contract laws that help take into account asymmetric
information or antitrust laws to prevent collusion between firms, inherent government failures
will prevent the formation of inefficient markets.
Regulations are rules that are created and implemented to ensure an efficient distribution of
goods and services.
1. Price and Quantity Regulations.
a. Price Regulations are mainly used against monopolistic firms to prevent
them from pursuing rent-maximizing prices and creating scarcity.
i. Price caps are a method of price regulation that set a temporary
price for a natural monopoly to charge and lower that price as the
regulator believes the monopoly can innovate as time passes.
b. Quantity Regulations are used when the scope of an externality may be to
great to contain by price, such as car emissions.
i. If firms producing products that have negative, relatively
uncontainable externalities, quantity regulations such as emission
standards can be implemented to prevent further damage. This is
also a way of creating an incentive for firms to innovate.
2. Direct and Indirect Information Provisions
a. Direct Information Provisions are explicit attempts by governments and
private agencies to present information to consumers in an attempt to
avoid asymmetric information.
b. Indirect Information Provisions are implicit attempts to address
asymmetric information problems when direct attempts are not possible
due to quality perceptions.
i. One of the approaches the authors examine is licensing to convey
quality.
1. Some of the problems associated with licensing are
problems with relevant training, a lax in training
innovations, and restrictions on low-priced and low-quality
alternatives
Supplying Goods through Nonmarket Mechanisms
Direct Supply by Government Bureaus
Governments supply various goods that private markets may not be able to provide or
would create possible moral problems. Some cases included in this are military services and
minting of currency.
Independent Agencies
1. Government Corporations and Special Districts. These government agencies
provide certain services for public consumption. Government corporations
sometimes provide services and goods that would, otherwise, be provided by a
natural monopoly at a higher price. Special Districts perform some of these
duties at the state and local level.
a. One of the problems associated with these forms of administration are
inefficiencies associated with the principal-agent arrangement.
Contracting Out
This is government use of private sector firms to provide services they are unable to due
to efficiency problems with government processes.
Providing Economic Protection
Insurance is a way of minimizing risk by spreading it out among a number of people. It can
come in two forms.
1.
Mandatory insurance and subsidized insurance are two methods the
government provides. Mandatory is provided to help avoid negative
externalities that could occur from those who are unable to obtain insurance.
Subsidized insurance acts as a contingency when unexpected events occur that
members of the public are unprepared for.
Cushions
1. Stockpiling. This method of cushioning is a way of saving current goods for
use in the future, acting as a buffer between price shocks and natural disasters.
2. Transitional Assistance. This form of cushioning takes into account
externalities by new government policies and projects that adversely affect the
public.
3. Cash Grants. Here, the government supplies programs that allow those
members of the public that receive them to spend the grants, freely, on
purchases they will need. One of the goals of this plan is to raise incomes,
promoting the economy.
Conclusion
While there are a large number of generic policies that can be pursued, we must keep in
mind that no one policy, though it may seem effective, can address the complexities of
constantly changing problems. Some policies may create unintended consequences that may call
for other incremental policies to be implemented.
It is good to have an understanding of how government and markets can fail and also to
have an understanding of generic policies that can work to solve these problems. With a good
foundation in both aspects, this increases the possibility of solving the problem in relation to its
goal.
CHAPTER10
Correcting Market and Government Failure
1) Generic Policies
a) Actions that government can take to deal with perceived policy problems
b) Familiarity with generic policies encourages a broad perspective that helps the analyst craft
specific solutions
c) Primary task of policy analyst is to identify those policies that have the best prospects for
improving social conditions
d) Five general categories:
i)
Freeing, facilitating, and simulating markets
ii) Using taxes and subsidies to alter incentives
iii) Establishing rules
iv) Supplying goods through nonmarket mechanisms
v) Providing insurance and cushions
2) Freeing, Facilitating, and Simulating Markets
a) Freeing Markets
i)
Deregulation
(1) It is difficult to justify government interference with private affairs on efficiency grounds
in the absence of evidence of market failure
(2) Deregulation of the US trucking, banking, railroad, airline, and other industries suggest
that large gains in social surplus result (raise living standards)
(3) Deregulation need not apply to all the activities of the industry – pricing, entry and
scheduling in the airline industry were largely deregulated while safety, traffic control,
and landing rights were not
ii) Legalization
(1) Refers to freeing a market by removing criminal sanctions
(2) Decriminalization is removing criminal penalties and replacing them with civil penalties
like fines
iii) Privatization
(1) The switch from agency subventions to user fees, the contracting out of the provision of
a good that was previously produced by a government bureau, denationalization or
desocialization the selling of state-owned enterprises to the private sector, and
demonopolization where the government relaxes or eliminates restrictions that prevent
private firms from competing with government
b) Facilitating Markets
i)
Allocating Existing Goods
(1) Allocation of property rights is highly relevant to water policy in the western US
ii) Creation of New Marketable Goods
(1) Most common form of these goods is tradable permits, usually for environmental
emissions
c) Simulating Markets
i)
Not efficient to auction the right to operate natural monopoly to highest bidder
ii) Winning bidder would be prepared to pay up to the expected value of the excess returns
from operating the natural monopoly and price accordingly
iii) More efficient approach is to require bidders to submit the lowest retail price at which they
will supply customers
iv) Winning bidder has both an incentive and an opportunity to cheat by reducing the quality of
the good
v) Auctions are used extensively in the allocation of rights for the exploitation of publicly
owned natural resources
3) Using subsidies and Taxes to Alter Incentives
a) More intrusive policies consist of subsidies and taxes
i)
They aim to induce behavior rather than command it
ii) Using taxes and subsidies in situations in which the intention is to correct market failures or
achieve redistribution
iii) Four general categories
(1) Supply-side taxes
(a) Output taxes
(i) Correct negative externalities to allow firms to choice of how much to reduce
production to limit their tax payment
(b) Tariff
(i) Tax on imported, and occasionally exported goods
(ii) Their importance is decreasing under global international agreements such as
the WTO
(iii) Also reduced importance under regional trade agreements such as NAFTA
(2) Supply-side subsides
(a) Matching Grants
(i) One way to increase the supply of goods is to give direct subsidies to the
suppliers of the goods
(ii) Subsidies also have different distributional consequences than taxes
(iii) While taxing goods with externalities usually generates revenue, subsidies must
be paid for with other taxes
(b) Tax Expenditures
(i) The most common form of supply-side subsidy
(ii) Change relative prices by making certain factor inputs less expensive
(3) Demand-side subsidies
(a) Aim at increasing the consumption of particular goods by reducing their prices to
final consumers
(b) Two basic methods of providing
(i) Subsidies (vouchers)
(ii) Personal deductions and credits (tax expenditures)
(c) In-kind subsidies
(i) Subsidize the consumption of specific goods
(ii) i.e. US food stamp program
(d) Vouchers
(i) Allow consumers to purchase marketed goods at reduced prices
(ii) Subsidizes a wide range of goods such as primary and secondary education, day
care, food and nutrition, environmental protection, and housing
(e) Tax Expenditures
(i) Commonly used to stimulate individual demand for housing, education, medical
care, and child care
(ii) Have effect by lowering the after-tax price of the preferred good
(iii) i.e. deducting interest payments on mortgages from taxable income makes
homeownership less expensive
(4) Demand-side taxes
(a) Commodity Taxes
(i) Also known as excise tax
(ii) Common applications are to reduce consumption of so-called demerit goods
like alcohol
(b) User Fees
(i) Technical terms often used by policy analyst for user fees include congestion
taxes, marginal social pricing, and optimal tolls
4) Establishing Rules
a) Frameworks
i)
Civilization is an agreed upon set of rules and behaviors.
ii) The first inclination of people in the same line of business when they gather together is to
collude and subvert the operation of a competitive market
iii) One of the most basic public goods is the establishment and enforcement of property rights,
including the rights to health and safety
b) Regulations
i)
Price regulation
(1) Frequently used as a method of preventing monopolies from charging rent-maximizing
prices
(2) i.e. FCC authority to regulate cable TV
(3) Large sectors of our energy, transportation, communication, and urban services sectors
are, or have been, regulated in this way
c) Quantity Regulation
i)
Quantity regulation as a means of controlling negative externalities is less flexible and
generally less efficient than market incentives
ii) Government limits the amounts of goods in the market
iii) i.e. quantity of pollutants
d) Direct Information Provision
i)
Requiring firms to supply information about various attributes of product quality is
becoming increasingly common
ii) Direct information provision is likely to be a viable policy response to pure information
asymmetry problems
iii) It is attractive because the marginal cost of both providing the information and enforcing
compliance tend to be low
iv) Providing information about the adverse health effects of smoking may not be adequate
because of the addictive nature of tobacco
e) Indirect information provision
i)
Licensure can be defined as “a regulatory regime under which only the duly qualified who
have sought and obtained a license to practice from an appropriate agency or delegate of
the state are legally permitted to perform or to take responsibility for given functions.”
ii) Certification involves exclusive rights to a professional designation but not to practice
5) Supplying Goods through Nonmarket Mechanisms
i)
There is no overreaching theory that delineates the efficiency trade-offs between market
failure and government failure
ii) The collection of taxes, printing of money, and administration of justice all could face
serious agency problems if supplied by private firms
iii) Double market-failure test
(1) Evidence of market failure
(2) Evidence either that a less intrusive generic policy cannot be utilized
iv) Once a decision has been made to supply goods publicly, governments can do so either
directly or indirectly
b) Direct supply by Government Bureaus
i)
involves production and distribution of goods by government
ii) government provides a vast array of goods
c) Independent Agencies
i)
Government Corporations
(1) Used for delivery of tangible and divisible goods in sectors that at least appear to be
natural monopolies
(2) Some independence from legislative or executive interference in their day-to-day
operations
(3) Most are in sectors in which natural monopoly or other market failure suggests the need
for government intervention
ii) Special Districts
(1) Single-purpose government entities, usually created to supply goods that are believed
to have natural monopoly, public goods, or externality characteristics
(2) Most common form in US is to provide primary and secondary education
(3) Other examples include air pollution, water, and transportation districts
d) Contracting Out
i)
Contracting where the service is delivered to consumers is an important component of the
health care system
ii) Corrections has been contracted out in the US (formerly delivered directly by government,
now many are private
6) Providing Insurance and Cushions
a) Insurance
i)
the essence of insurance is the reduction of individual risk through pooling
b) Mandatory Insurance
i)
States mandate liability coverage for all drivers so that those injured have opportunities to
obtain compensation through tort law
ii) If programs were not mandatory, those paying the subsidies through higher premiums or
lower benefits would be unlikely to participate
iii) Does not require that individuals be restricted from purchasing additional, supplementary
insurance
c) Subsidized Insurance
i)
Rather than mandating insurance, the government can provide it at subsidized premium
ii) Governments often force private insurers to write subsidized policies in proportion to their
total premiums
d) Cushions
i)
Stockpiling
(1) Programs that accumulate quantities of the resource during periods of normal market
activity so that they can be released during periods of market disruptions
(2) Strategic Petroleum Reserve stores about 700 million barrels of crude oil
(3) State and local governments typically operate with a balanced budget, can prepare for
revenue shocks by stockpiling financial resources (rainy day funds)
ii) Cash Grants
(1) The most direct way to cushion people against adverse economic circumstances is
through cash grants
(2) If recipients reduce their work effort, then their chances of becoming dependent on the
cash grant increases
(3) For permanently disabled, the increased risk of dependence is not as serious
(4) Work requirements may be one way to improve the terms of the trade-off, although
they are typically costly and difficult to implement, especially for single-parent families
with young children
Chapter 11: Thinking Strategically About Adoption and Implementation
Cooperation is necessary!
Proposal begins in the political arena and culminates with people. (page 312 2nd edition)
This is a process that occurs in two phases:
Adoption
(begins)
(ends)
Formulation of a proposal
Formal acceptance of a proposal

Policy analysts typically formulate and evaluate proposals so they work hard during the
adoption phase.
Implementation
(begins)
(ends)

Adoption of policy
Until policy no longer in effect
Policy analysts must consider the ramifications of implementation by anticipating the
entire process from proposal to effect.
The adoption of a policy rarely tells the whole story. Often policy decisions are driven by
policy adoption.

A good example of this is our recently passed legislation which places limits on smoking
in public places.


There is a lack of enforcement.
More policies will have to be generated in order to increase the effectiveness of this
policy.
Cooperation is necessary!
Cooperation is impacted by:
 Values
 Interests
Policy analysts must think strategically!
1.
2.
3.
4.
to better understand the implementation process
to gain insight on feasibility
to perceive potential problems
to be able to advise, direct, oversee, or manage implementation
Adoption Phase

Assess and influence political feasibility
i. Identify relevant actors
1. understand the motivation and beliefs of actors
2. Assess resources of actors
3. Choose the arena

Political strategies within arenas
i. Co-optation
ii. Heresthetics
iii. Rhetoric
Implementation Phase

Implementation: Factors Affecting Success and Failure
o Logic of the policy: Is the theory reasonable?
o Assembly: Who has the essential elements?
o Availability of “Fixers:” Who Will Manage the Assembly?

Anticipating Implementation Problems
o Forward Mapping: Scenario Writing
 Write the scenario
 Critique the scenario
 Revise the scenario
o Backward Mapping: Bottom-Up Policy Design
Thinking Strategically About Policy Design




Uncertainty and Error Correction
Redundancy and Slack
Anticipating Evaluation
Facilitating Termination
Coping with Diversity


Bottom-Up Processes
Phased Implementation
Conclusion
Know the political environment!


Promote the values and interests of the actors!
Anticipate problems with implementation

Know the interests of the actors!
Chapter 11: David
Implementation”
Weimer
and
Aidan
Vining
“Adoption
and
Collective decisions can be divided into two phases:

Adoption phase – begins with the formulation of a policy proposal and ends when it is
formally accepted as a law, if ever accepted as law.

Implementation phase – begins with the adoption of the policy and continues as long as
the policy is in effect
Chapter focuses on strategic thinking in policy analysis for four reasons



It enables us to understand the implementation process better by understanding the actors
Many analysts want to consider the political feasibility of adoption of policy alternatives
Designing effective policy alternatives requires creativity which helps us take advantage
of the self-interested behavior of others

Analysts often participate in adoption and implementation efforts
The Adoption Phase

What determines political feasibility?
o Political feasibility refers to the possibility of adopting a policy not whether
citizens will accept the policy

Ronald Meltsner provides a checklist of information needed to assess the political
feasibility of adoption
o Identify the relevant actors: the relevant actors will be anyone with a strong
interest (economic, partisan, ideological, or professional) will become an actor
and those in official positions
o What are the actors’ motivations and beliefs – organized interests groups will be
obvious because they will be clearly stated, but public officials won’t be as easy
to identify because their opinion will be determined upon electoral considerations
o What are the actors’ political resources – the resources of the actors will vary
interest groups have the influence of those they claim to represent (electoral
power) as well as any financial donations made by their clients, public officials
can vote, hold hearings which define what a policy looks like, and others have a
more informal way of influencing policy on an ad hoc basis
o In which political arena will the relevant decisions be made – knowing the formal
and informal rules of the institution the policy is being debated in will be
important for choosing one’s strategy of potential influence or if the vested
interests attempt to move the policy debate to a different arena more amenable to
their preferences

Other general ways to achieve policy implementation
o Co-optation – an attempt to get potential opponents involved in the early policy
formulation so that they feel the policy was designed by their interests this makes
them less likely to oppose the policy
o Compromise – amending a policy proposal so that it does not raise as many
objections or gains new allies
o Heresthetics – strategies that attempt to gain advantage through manipulation of
the circumstances of political choice this can occur in two ways:
 Manipulating the agenda, setting rules that serve your policy preferences
or determining the order certain issues will be raised
 Alter the dimension of evaluation, if you are in the minority it may be
beneficial to introduce a new consideration that will splinter the majority
so that the bill cannot be passed
o Rhetoric – provides correct and relevant information that clarifies the probable
impacts of proposed policies or it could provide incorrect or irrelevant
information that distorts the impacts of proposed policies
The Implementation Phase

What factors influence the likelihood of successful implementation?
o Logic of the policy

The greater legal authority the adopted policy gives bureaucracy, the
greater their capacity to implement the policy
 The greater political support the policy has also enables bureaucrats to
implement the policy better
 On the other hand if a policy is not clearly defined as to what its goals are
or what should be done policy failure is more likely to occur
o The nature of the cooperation it requires (similar to the questions asked of
political feasibility of adoption)
 In order for a policy to be successful the people who control the resources
for the policy to succeed must cooperate which may not always be the
case.
 For instance a mayor who does not want something occurring within
his/her jurisdiction may not allocate the resources needed to ensure
implementation
o The availability of skillful and committed people to manage its implementation
 Among the most important people responsible for successful
implementation are the bureaucrats responsible for a policy’s


implementation; having someone who believes in the policy’s beneficial
outcomes will be best for policy success.
Someone who dislikes the policy may drag his/her feet. If this situation
were to occur a “fixer” would be needed. This is someone who will
oversee the policies implementation and can intervene in the policy
process if the bureaucrats responsible for implementation are not enacting
the policy
Another helpful element is having local allies who have an interest in the
policy’s success. These are people who will scrutinize their local officials
and raise awareness among the general population when the policy is not
being implemented.

Anticipating Implementation Problems
o Forward Mapping: Scenario Writing
 This means that policy analysts must make plans for the worst case
scenario, examine who will shirk their responsibilities and place
limitations on such actions.
 The policy must specify exactly what must be done under every
circumstance imaginable to ensure the desired outcomes are achieved
o Backward Mapping: Bottom-Up Policy Design

Policy analysts must thing about the behavior that they wish to change.
They must answer the questions: what interventions could alter the
behavior, and what decisions and resources are needed to support the
interventions?
Thinking More Strategically about Policy Design

Policy making requires prediction but since the world is complex our predictions will
likely be wrong so we must account for error in our plans and attempt to limit it as much
as possible
o Redundancy and slack – ensure that there is no overlap in responsibilities because
it results in wasted resources
o Anticipating evaluation – design a policy so that evaluation the policy success/
failure is easy to monitor
o Facilitating termination – when we are uncertain about the desirability of the
policy or the beneficial use of the policy over a long period of time there should
be a built in mechanism that allows for the policy to be phased out. Otherwise
those who have vested interests in the policy will lobby vehemently for its
continued existence
Policy Analysis
Chapter 12
Government Supply: Drawing Organizational Boundaries
Public policies usually require organizations for their implementation. The analysis of
organizational forms requires analysts to pay attention to rules that govern various sorts of
transactions. Neoinstitutional economics (NIE) retains the core assumptions of economic theory
but explicitly considers the rules and information relevant to various sorts of transactions. NIE
concepts are useful in considering the appropriate boundaries for public organizations.
The major purpose of redrawing organizational boundaries of public agencies should be to
improve the efficiency with which public services are delivered. The key challenge for policy
analysts is to take account of all costs and benefits in assessing efficiency.
Transaction cost theory recognizes that production costs are only part of the total costs of
organizing the supply of a good or service. In addition, there are transaction costs associated
with making and executing contracts among the entities engaged in the production process.
The challenge is to find organizational arrangements that minimize the total costs of supply,
including those associated with making, executing and monitoring contracts.
Fundamental ideas behind transaction cost theory:

The theory uses “the transaction,” whatever it may be in the particular context, as the unit
of analysis.

Transaction cost theory recognizes that almost all production relationships involve
contracts. The contracts can be formal, as in legal documents, or informal, as in
customary practice.

It recognizes that contracts are rarely, if ever, complete—the world is complex, and
unforeseen contingencies can almost always arise.

This theory recognizes the ubiquity of informational asymmetries. These may arise as
hidden information, in which someone has relevant information unavailable to others, or
as hidden action, in which someone can take relevant actions that are unobservable by
others.
 “Transaction cost economics is concerned mainly with the governance of
contractual relations”
Production Costs, Bargaining Costs and Opportunism Costs:
Three types of costs are relevant to the choice between direct production by public
agencies and contracting out: production costs, bargaining costs and opportunism costs.
Production costs are the costs associated with directly creating the good or service. Bargaining
and opportunism generate the transaction costs of governance.
Production Costs:
Production costs are the opportunity costs of the real resources—land, labor and capital—
actually used to produce something, measured in terms of the value of things that these resources
would have produced in their next best alternative use. In a competitive environment free from
serious market failures, profit-oriented firms generally have lower costs than public or mixedownership organizations. Production costs are likely to be lower with competitive contracting
out and there is considerable empirical evidence from a range of government activities that
contracting out by government to private suppliers generally lowers production costs.
Bargaining Costs:
Bargaining costs include the following components:
-the costs arising directly in negotiating contract details
-the costs of negotiating changes to the contract in the postcontract stage when
unforeseen circumstances arise
-the costs of monitoring whether performance is being adhered to by other parties
-the costs of disputes that arise if neither party wishes to utilize pre-agreed
resolution mechanisms
Bargaining costs arise when both parties act with self-interest, but in good faith.
The Costs of Opportunism:
Opportunism is behavior by a party to a transaction designed to change the agreed terms
of a transaction to be more in its favor. Opportunism costs arise when at least one party acts in
bad faith. Opportunism is more likely in the context of contracting out than in agency
production, because the question of who gets rents is more relevant in the nonhierarchical
relationships between organizations. Additionally, employees within organizations have better,
and usually more frequent, opportunities to “pay back” opportunistic fellow employees within
the same organization. Opportunism is more often considered to occur after contracting has
taken place, but some behaviors prior to contracting have opportunism-like characteristics.
While analytically it is possible to make a sharp distinction between bargaining and
opportunism costs, they are difficult to distinguish in practice. An inability to distinguish
between legitimate bargaining and opportunism itself raises contracting-out costs.
In summary, public policy should seek the governance arrangements that minimize the
sum production, bargaining, and opportunism costs across government, contractees and third
parties for any given level and quality of service.
Predicting Bargaining and Opportunism Costs:
Task Complexity:
Task complexity is the degree of difficulty in specifying and monitoring the terms and
conditions of a transaction. Complex tasks involve uncertainty about the nature and costs of
production processes itself. Greater uncertainty raises bargaining costs, both during contract
negotiations and execution and information asymmetry is likely to crate circumstances in which
a party to the transaction can behave opportunistically.
Contestability:
A contestable market is one in which even if only one organization is immediately
available to provide a service, many others would quickly become available if the price offered
by contact exceeded the average cost incurred by contractees.
When the market for the service in question is highly competitive with a large number of
organizations in the relevant market producing the service, or very close substitutes, the public
agency will likely be able to realize lower production costs without substantially higher
negotiation and opportunism costs.
If the market for the activity is contestable, then opportunism is reduced at the contract
stage and potentially at the execution stage.
If potential contractees perceive the public agencies are soliciting unreasonably low bids
or are arbitrarily requiring them to rebid at lower than originally contracted prices, then a
competitive market may not emerge. Such behavior can thwart competition even in potentially
competitive markets.
Asset Specificity:
An asset is “specific” if it makes a necessary contribution to the production of a good or
service and has much lower value in alternative uses. There are various kinds of specificity,
including physical, locational, human and temporal specificity. Contracts that require either
party to employ assets raise the potential for opportunism.
From a social efficiency perspective, government opportunism is as undesirable as
contractee opportunism.
-Can Opportunism Be Controlled by the Use of Not-for Profits?
Because of the difficulty of monitoring performance, the profit-making firm may provide
inferior goods at excessive prices. In other words, donors may “trust” not-for-profits as having a
strong sense of mission that leads them to maximize the output of desired goods. One additional
potential advantage of contracting with not-for-profits is that their form allows for voluntary
contributions—those who value the supplied good can provide it or, where some level is
provided by government, make additional contributions to expand its supply.
Assessing and Building Capacity:
Public agencies may be able to make intraorganizational investments to increase the
range of services for which contracting is feasible. Building organizational capacity to monitor
service quality may reduce opportunism once the contract is in place. More generally, the
appropriate first steps for effective contracting out of services may be adding capacity to the
central functions of public agencies. An agency is likely to be better able to steer effectively if it
has personnel with rowing experience. In other words, it might be worthwhile to bear higher
contract administration costs and perhaps forgo some economy of scale to reduce future
opportunism.
Conclusions:
All public agencies contract out the production of some goods. Deciding whether to
contract out for more complex inputs to production, requires analysts to consider governance as
well as production costs. These include the incremental costs of bargaining and opportunism
over those that would result from in-house production. These incremental costs are likely to be
high when the task to be completed by contractees are complex, contestability for the contracts is
low, and production require specific assets.
Weimer and Vining- Policy Analysis: Concepts and Practice
Chapter 12: Government Supply- Drawing Organizational Boundaries
Public policies need organizations for implementation
Neoinstitutional Economics (NIE)- economic theory w/explicit consideration to rules and
information of various transactions
Useful in considering appropriate boundaries for public organizations
Transaction cost theory/economics- A field of NIE
Used to address efficiency, ultimately deciding the shape of the
organization (public, private, hybrid)
4 Fundamentals of Transaction Cost Theory
1) the transaction is the unit of analysis (delegation)
2) production relationships involve contracts
3) contracts are rarely complete (unforeseen contingencies)
4) Informational asymmetries are ubiquitous
Summary- Transaction cost theory mainly concerned with governance of
contractual relations.
Public agency or Contract out- Three costs
Production costs
Opportunity costs of real resources (what could have been done instead)
Three reasons why contracting out has lower production costs:
1) public agencies tend to low efficiency, failure to achieve economy of
scale
2) lack of competition blunts comparative performance benchmark
3) inflexibility in factor inputs- lose out on best employees, equipment,
etc.
Bargaining costs- self interested, but in good faith
1) negotiating contract details (parties involved, stipulations, details)
2) cost of unforeseen changes
3) monitoring performance of contracted party
4) costs of when contract breaks down
Opportunism costs- self interested actions in bad faith
More likely in contracting out (rent-seekers)
Predicting Bargaining and Opportunism Costs- 3 factors
Task Complexity
Specifying and monitoring terms and conditions of transaction (information
asymmetries, externalities, quality assessment post transaction)
Contestability
Capability of new organizations to offer service/product
Asset Specificity
A necessary contribution to production of good/service- physical, locational,
human,
temporal
The case for Not-for-Profits
Maximize outputs over profits, creates a level of trust
Always some contracting out (pencils)
Consideration of governance and cost
High costs when:
Task is complicated, contestability low, need for specific assets exists
February 5, 2007
PSC 723/ EPS 710
Policy Analysis, Weimer and Vining, Chapter 13
Gathering Information for Policy Analysis
Models and Theories are useful for policy analysis but have an inherent flaw. They tell the broad
trends and general directions of expected impacts but not the magnitude. Data must be collected
in order to analyze these aspects of empirical questions.
The initial step in policy analysis is to gather data. The data is required to discover facts that
may affect the magnitude of change from a policy. Determining the size of the impact of a
policy is also necessary to evaluate alternatives. Data allows us to make inferences we can treat
as facts. Data gathered is organized by theories and thus support our assertions.
Two important points: (1) Facts are measured by elasticity. The theory employed can weaken or
strengthen a fact depending upon the inference. (2)All facts to some extent are uncertain. We
can not prove any assertion with logic alone. Balancing inconsistent evidence is necessary to
reach conclusions about appropriate assertions.
Data gathering for policy analysis is divided into two categories:
Document Research and Field Research.
DOCUMENT RESEARCH and DATA AND STATISTICAL SOURCES-“Relevant literature is
easier to identify and more usable the greater the extent to which the policy problem is universal
rather than particular” frames the focus for research. The exception to this rule is for new or
emerging issues.
Categories of Literature Review
A.
Journal Articles, books, and dissertations- journals run by editorial boards
inclusive of academics and scholarly norms. Be aware of disciplinary biases.
Strengths are competency, honesty, and extensive reference lists. Most useful is
Journal of Economic Literature (JEL). Dissertations provide in-depth information
and extensive bibliographies. Commercial service can be used to access abstracts but
full text not usually available in libraries-it must be requested from Microfilm library
in Michigan. Numerous books on policy topics published annually. Economics
topics reviewed and available through JEL.
B.
Publications and reports of interest groups, consultants, and think tanks-Interest
groups and consultants are sections of corporations, labor unions, trade and
professional organizations formed to produce policy analysis or policy-relevant
information. They provide information of potential goals and alternatives and help
you prepare for political opposition. Address oppositions in your analysis rather than
later. Think tanks are based in Washington D.C. and several national and
international large cities. They provide policy relevant analysis but in the last decade
have lost some credibility and should be considered an interest group until reviewing
research standards employed by specific organizations. Most have web sites and a
list of world wide think tanks can be found at www.nira.go.jp
C.
Government publications and research documents- US government produces
100,000 documents annually. Catalog found at www.cpo.gov and several other sites.
Popular search engines easily utilized for search of these documents too. Legislative
documents, committee reports, federal executive agencies records, US Supreme Court
rulings and state/local government actions are categories for consideration in data
collection.
D.
Popular press –provides background information on topics especially new issues
before they appear in scholarly journals. Newspapers quote experts, stakeholders,
organizations, and documents that could be valuable resources.
E.
Internet- References are cited to (1) Give credit to authors (2) Help others find the
sources (3) Provide credibility and authority of the document cited. These three
purposes are challenged when using the internet because web pages may change and
it is difficult to acknowledge those responsible for the information. Web information
lacks peer review, consistent editorial review, and fails to provide credibility to
source. Always provide complete internet address for any citations.
FIELD RESEARCH “consists of talking to people, gathering raw data, or finding
unpublished reports, memoranda, or other organizational documents.” Interview key people
in organizations, including recently retired persons. Include an organizational chart of those
interviewed. Interviews may be in person or via telephone or email. Four major points to
consider when interviewing:
A. What information will interviewing elicit most effectively? (history, facts, attitudes)
B. How can the efficacy of an interview be judged? (Biases, coherence, specificity)
C. How do you get the interviewees to talk? ( Ask questions, avoid hostility)
D. How should you decide to interview someone? (Early in the process or later)
Conclusion: Researchers should spend half their time doing data collection and half their
time thinking-model simple; think complex. Quantity of data is not the goal, collected data
must be placed into analytical framework.
Policy Analysis: Concepts and Practice- Ch. 13
Gathering Information for Policy Analysis:
- Predicting the size of impacts is necessary when evaluating alternative policies.
- You must find all the facts possible to help understand current market issues and governmental
set backs that could have and affect on policy alternatives.
- Collect data to help discover facts.
- Facts can be very subjective. What the researcher considers a fact will make a difference on the
theory. Almost all facts tend to have an aspect of uncertainty. The solution is to balance the
inconsistent evidence to reach conclusions about appropriate assertions.
Gathering evidence can be divided into two categories: document research and field research.
AKA- documents and people (Eugene Bardach)
- Field research: conducting interviews and gathering original data
- Document research: reviewing relevant literature dealing with both theory and evidence and
locating existing source of raw data.
Document Research:
Literature is easier to identify and more usable if the problem is universal rather than particular,
national rather than local, strategic rather than tactical, and inherently important rather than
unimportant. (Macro v. Micro basically)
The bigger the problem the more literature! Unless this is a new problem.
Literature Review:
Four general categories to use:
1. Journal articles, books, dissertations
2. Publications and reports of interest groups, consultants, and think tanks
3. Government publications and research documents
4. Popular press
One place to begin research is in a topic-orientated journal. (Mortgage crisis- use a Housing
Journal, etc.) The problem with this is the journal can occasionally make the topic sound more
unique than it truly is. One must also understand what motives might be behind the publication
of these journals. Journals tend to usually meet the basic standards of competence and honesty
because they are run by editorial boards full of academics. Periodicals tend to be run by
individual firms or interest groups and can prove to be a bias source. Accessibility and
creditability need to be taken into consideration when using something produced by an interest
group. Also, journals provide extensive references unlike periodicals.
Policy relevant items produced by interest groups are twice annually vetted by The Capital
Source, published by the National Journal. The Research Centers Directory, published by Gale
Research Company checks on university centered think tanks. Etc.
The US Government is also one of the world’s premier publishers creating 100,000 documents
yearly. Some can be found on the websites of the Congressional Budget Office (www.cbo.gov),
the Council of Economic Advisers (www.access.gov/eop/index.html) and the General
Accounting Office (www.gao.gov).
Data and statistical sources:
Check out: the Statistical Abstract of the United States published annually by the US bureau of
the Census. Also, the American Statistics Index: A Guide to the Statistical Publications of the
U.S. Government. Universities and think tanks also provide data.
Three main reasons for documenting sources:
1. To give credit to others for the information and ideas that they have made available.
2. Documentation helps others find the facts and verify your claims.
3. Documentation provides credibility and authority to your paper.
Field Research consists of:
Talking to people, gathering raw data, finding unpublished reports, memoranda, or other
organizational documents.
- Check your literature review for ideas on what people to interview
- Do not limit yourself to current employees of an organization. Look for recently retired
members too.
- You can interview in person, on the phone, or email.
- Check out interview guide pg. 319
- Never let the interviewee know that you are unsure of the subject. Always be prepared but
flexible.
Putting it all together:
Documents lead to documents, documents lead to people, people lead to people, and people lead
to documents.
Create a simple model, but think complex. Yet, make sure you are not in a position where you
can’t see the forest for the trees.
Policy Analysis Chapter 14 Review
Confronting Policy Problems
Chapter 14 focuses on the policy construction process, specifically how one should plan and
execute policy analysis. Policy analysis keeps central the notion that as a process we must
formulate and communicate useful advice to our client.
Analyze yourself first. We need to develop a strategy for doing analysis; analysis of the analysis.
It may be done by looking at your first attempt at a policy analysis (preferred method) or on your
more recent experience in writing academic papers (least preferable). Policy students fall into
two broad categories: linear and nonlinear.
Linear thinkers tend to solve problem by moving sequentially through a series of logical steps.
Nonlinear thinkers tend to view problems configuratively, moving back and forth over steps as
various pieces of the puzzle become apparent and fall into place. Each has its own strengths and
weaknesses.
Our formal schooling has made us familiar with problem sets in mathematics and statistics where
right and wrong answers can be specified. Policy analysis is never so certain. There is never a
right or a wrong answer in the policy process. The approach you choose should allow you to
eliminate or minimize your weakness.
The first rule we must come to accept at policy analysts is that linear thinkers should adopt
nonlinear thinking strategies, while nonlinear thinkers should adopt linear writing strategies.
Nonlinear thinkers can and should continue to think nonlinear, but they must learn to write
linearly and comprehensively. Likewise, linear thinkers will find that they will be more
productive and less vulnerable to analysis paralysis if they adopt nonlinear work strategies.
Policy analysts do not need to understand a policy problem fully to be able to sketch out some
generic policy alternatives.
The second meta-analysis rule is that analyst should simultaneously utilize linear and nonlinear
mc when conducting policy analysis.
The Client Orientation:
-The first rule is to address the question that the client poses.
.
It is almost always better to answer with uncertainty with the question that was asked than to
answer with certain a question that was not. What should you do if you are sure your client
asked the wrong question? Explain to them fully why you believe this is the case.
The Rationalist Policy Approach:
.
The policy analysis process (see fig. 14.1 pg. 328). Most analysts suffer in the ex from looking
only at solutions. They suffer from recommendationitis, or trying to cram their complete analysis
into their recommendations, this is most common nonlinear thinkers..
Problem Analysis
Understanding the problem
Choosing and explaining relevant policy goals and constraints
Choosing a solution method
.
.
Understanding the policy problem involves assessing the conditions that concern your client,
framing them as a market or government failure, and modeling the relationship between the
conditions of concern and variables that can be manipulated through public policy.
~ Framing the problem is a specification of the expected deviation between individual
self-interest and aggregate social welfare.
~ Modeling the problem requires investigating the symptoms that prompt client
interest and framing them in terms of market and government failures.
The most difficult step in policy analysis is deciding on appropriate goals. Goals are multiple,
conflicting, and vague, once you recognize this reality you can deal systematically and
successfully with them. The difficult task we face is distinguishing between goals (the values we
seek to promote) and policies (the alternatives and strategies for promoting them). This becomes
confusing because everyday language states policies as goals {i.e. our goal is to reduce class size
to 18 students).
Choosing the appropriate solution method is based upon the nature and number of your goals.
Our ultimate goal lies in cost-benefit analysis. Cost benefit analysis reduces all the impacts of a
proposed alternative to a common unit of measure, dollars. Once reduced to dollars we must
determine if individuals are willing to pay dollars to have something, if so then it's a benefit, if
they are willing to pay to avoid it, then it's a cost. In an instance that an item cannot be broken
down into dollars, then it would require a qualitative cost-benefit analysis, such as hours of
delays it takes to widen the U.S. 95.
In some cases we will have multiple goals and cost-benefit analysis is not adequate, we then use
a solution analysis. Solution analysis requires five steps:
~ Selecting impact categories for the relevant goals (pg. 345)
~ Generating a mutually exclusive set of policy alternatives (pg. 346)
~ Predicting the impact that each alternative would have in terms of goal achievement (pg. 348)
~Valuing the predicted impacts, either using qualitative, quantitative, or monetized measures
(pg. 351)
~Evaluating the set of alternatives against the goals and making a recommendation (pg. 35S)
Conclusion
This chapter has focused on policy analysis as the process of providing useful written advice to a
client. We set out a series of sequential steps, the rationalist mode, which should help you
structure your written product. Although much practical advice was given in this chapter, the
analytical process cannot be reduced to a simple formula" For further help look at Chapter 1
which provides an example of a policy analysis in the format outlined in this chapter and Chapter
15 which gives us some examples of goals/alternatives matrices to illustrate this important focus
of policy analysis.
Chapter 14 Weimer & Vining Reading Summary
Landing on Your Feet
How to Confront Policy Problems
The focus of this chapter is on strategies for how one should construct and execute a policy
analysis, while keeping the notion that policy analysis as a process involves formulating and
communicating useful advice to a client.
The suggested first step in doing a policy analysis is to do an analysis of your analysis. A self
analysis should influence the way in which you go about doing a policy analysis. One may base
the self-analysis either on the first attempt at a policy analysis, or on past experience in writing
academic papers. The former is the preferred method.
Types of thinkers and writers:
Linear: tend to solve problems by moving sequentially through a series of logical steps. Their
strength is their great organization, while their weakness tends to be having trouble getting an
analysis going initially.
Nonlinear: tend to view problems configuratively, moving back and forth over steps as various
pieces of the puzzle become apparent and begin to fall into place. Their strength is their ability
to get ideas out and start moving, while their weakness is that their work tends to be
unorganized.
Neither approach is particularly advantageous over the other. In fact, a hybrid version of both
types of thinking is suggested as the best way to do analysis. Linear thinkers should adopt
nonlinear thinking strategies to prevent analysis paralysis, while nonlinear thinkers should adopt
linear writing strategies to keep their work organized and flowing properly.
The Client Orientation
Since policy analysis is client driven, client orientation must be addressed.
Heuristic 1: You must address the issue the client poses.
Heuristic 2: It is almost always better to answer the question posed with uncertainty, than to
answer with certainty a question that wasn’t asked.
Heuristic 3: Good analysis does not suppress uncertainty, whether with respect to facts or
theories. It is more effective to highlight ambiguities than to suppress them.
Ambiguity does not mean one cannot draw conclusion based on analysis. For example, if a
policy problem presents evidence supporting both sides of an issue, you should succinctly
summarize evidence on both sides of the issue, and then reach your conclusion. In addressing
ambiguity, it is always best to keep the client aware of both the arguments, and your conclusions,
to prevent them from being blind sided with the other side of the coin. If you believe your client
is asking the wrong question while searching for answers to an issue, it is best to inform them as
to why you believe they are looking in the wrong place.
Steps in Rationalist Policy Analysis
It is important to spend some time on defining, explaining, and modeling the problem in a useful
way, because the problem model determines the rest of the analysis, including which goals and
methods should be used to judge the desirability of alternatives and the selection of policy
alternatives.
A good way to structure an analysis is to divide the process into two major components: problem
analysis and solution analysis. Both are vital.
The Problem Analysis consists of 3 major steps:
Step 1: Understanding the problem, which involves assessing the conditions that concern your
client, framing them as market or government failures, and modeling the relationship between
the conditions of concern and variables that can be manipulated through public policy.
Assessing the conditions involves determining their empirical basis, in other words, looking for
data that will help to put the conditions in a quantitative perspective. A literature review of the
symptom should be sufficient. Once a condition has been assessed the framing process should
begin. Potentially any positive, or predictive, social science model can be used as the basis for
problem analysis. The major focus of explanation here is a specification of the expected
deviation between individual self-interest and aggregate social welfare. The framing of
problems, in terms of market and government failures, often leads directly to models linking
policy variables to the conditions of concern.
Step 2: Choosing and explaining goals and constraints, which involves dealing with the
vagueness, multiplicity, and conflict among goals as part of the analytical process. Also,
clarifying the distinction between goals and policies. Specifying goals requires one to be
normative: you often must decide what should be wanted. Two strategies for determining
appropriate goals are: 1) accepting that goals are outputs of analysis as well as inputs to
analysis, or, in other words, dealing with the vagueness, multiplicity, and conflict among goals
as part of the analytical process; and 2) clarifying the distinction between goals and policies.
Goals should be used to evaluate alternative policies, but if a policy is stated as a goal, how
can one evaluate it? To avoid this mix up, it is recommended to start by formulating goals as
abstractly as possible and policy alternatives as concretely as possible.
We are encouraged to take seriously the question of other appropriate goals whether
substantive or instrumental. Substantive goals represent values, like equity and efficiency that
society wishes to secure for their own sake. Instrumental goals are conditions that make it
easier to achieve substantive goals.
It is also important to clarify the tradeoffs between goals. The set of feasible policies, which
usually must be identified by the analyst, determine the desirable trade-offs among goals. The
weights placed on goals are more commonly an output of, rather than an input to, policy
analysis.
Step 3: Choosing a solution method. One must decide which goals are relevant to the analysis
before beginning to consider solutions systematically. The nature and number of goals largely
determine the solution method. It is important to remember that policy analysis is an ex ante
exercise, in which we are evaluating polices before they are introduced. Policy makers are also
interested in ex post analysis to understand the performances of policies after they have been
put into operation (program evaluations). However, policy analysis and program evaluation
are distinct, although related, activities. They are related because if an ex ante policy analysis
has compared alternatives in terms of specified goals, impacts, and valuation criteria, it usually
makes sense to conduct the ex post program evaluation of the alternative actually implemented
using the same goal, impacts, and criteria.
The 5 basic approaches to policy analysis
1. Formal ex ante cost benefit-should be your primary solution method when you believe that
efficiency is the only relevant goal.
2. Qualitative ex ante cost-benefit analysis-should be used if all efficiency impacts cannot be
reasonably monetized.
3. Modified ex ante cost benefit analysis-can be employed when one is able and willing to
monetize impacts on both efficiency and other predetermined goals.
4. Ex ante cost-effectiveness analysis-is appropriate when both efficiency and the other goal
can be quantified but where the other goal cannot be monetized.
5. Ex ante multi-goal policy analysis-should be used as a solution method, when 3 or more
goals are relevant. Since policy problems rarely involve only one value, multi-goal policy
analysis usually serves as the appropriate solution method. Therefore, a discussion of
solution analysis deals with the general case of multiple goals.
Solution Analysis 5 Steps
1. Selecting impact categories for the relevant goals, which involves specifying the relevant
impact categories for assessing how well each policy alternative contributes to each goal.
2. Generating a mutually exclusive set of policy alternatives by creating a detailed
specification of policy alternatives that can potentially promote the policy goals.
3. Predicting the impact that each alternative would have in terms of goal achievement.
This involves predicting how the alternative will do in terms of the goal or impact
category.
4. Valuing the predicted impacts, either using qualitative, quantitative, or monetized
measures. Determine how desirable the impact is from a policy perspective.
5. Evaluating the set of alternatives against the goals and making a recommendation. The
recommendation should include an explanation of your basis for the choice.
When presenting a recommendation, you should first advise your client as to what they should
do. Then, explain to them why they should do it. Lastly, tell them the best way to do it.
Communicating the Analysis
Clients vary greatly in their levels of technical and economic sophistication; the analysis should
be written and presented accordingly. Clients usually want to be involved in the analysis at some
level. It may be beneficial to share a preliminary draft, and keep them updated with oral reports.
Clients are typically busy people with limited attention spans. It is important to produce an
analysis that anticipates your client’s limited time and attention. Timeliness of your reports is
vital when your advice is needed for a client to make a scheduled decision. When presenting
your recommendations, give an executive summary in the beginning, rather than requiring your
client to hear everything before the conclusion. The summary should be a concise statement of
the most important elements of your analysis, including a clear statement of your major
recommendations. A table of contents should be provided, so your client can see at a glance
where the analysis is going. Headings and subheadings allow the client to move through an
analysis much more quickly. Headings should approximately correspond to the steps in the
rationalist mode. Diagrams, graphs, and tables can be very useful for illustrating, summarizing,
and emphasizing information.
It is important to establish credibility in an analysis. Keys to doing this include making sure that
your sources are cited completely and accurately, flagging uncertainties and ambiguities in
theories, data, facts, and predictions, and being “value overt”, that is clearly setting out the
important goals and explain why you believe that they are important.
Weimer & Vining, Chapter 15
Goals/Alternatives Matrices: Some Examples from CBO Studies.
The most useful heuristic in the rationalist approach:
You should predict and value the effects of each alternative on every goal and every impact
category relating to a goal.
By presenting information a goals/alternatives matrix, a policy research can use it as a “score sheet” to aid
in interpretation of various trade-offs in the decision making process.
In this chapter, Weimer & Vining examine a few CBO (Congressional Budget Office) case studies.
1)Auctioning Radio Spectrum Licenses vs. Lottery vs. Comparative Hearing
Auctioning licenses-potential to bring lots of money to the government.
Policy goals: economic efficiency, fairness, federal revenue. (see chart on pg. 365).
Note that chart is criticized for lack of explicit comparisons in the “Fairness” column. “Establishing
specific impact categories, such as the impact on access to licenses by smaller financial interests and the
extent of scarcity rent capture for taxpayers, would have facilitated clearer prediction and ranking.”
Postscript: Congress decided to go with auctions, and auctioned off three 30 MHz bands for personal
communication services, which brought in $18 billion dollars.
2)Restructuring the Army
How to add more support troops to the army, to allow for the possibility of a two-front war? The army
wanted to convert 12 National Guard combat brigades to support units.
The CBO’s goal was to come up with a solution that was cheaper than the army, but still keep
deployment times low. (seep chart on pg. 369).
The critique of the CBO’s plans are that they “trade higher levels of risk in the speed of deployment for
reductions in budgetary costs.” The plans were naïve and not optimal, if the goal is to actually win a war.
The assumptions seemed off; counting on 62,000 support troops from Saudi Arabia is ridiculous.
3) Launching Digital Television
By switching over from analog to digital television technology, broadcasters can provide better picture
quality, and pack more content into a given bandwidth. The trade-offs are costs to consumers, either
having to replace their analog television with a digital one, or getting a digital adapter.
Policy goals: auction receipts, equity issues, and economic efficiency.
(see charts pg. 371 and 374-375).
This is a very esoteric topic, and the benefits of the various plans are not readily apparent (at least not to
me). The main point to take from this section is the CBO’s use of existing data to create measures of
efficiency, “finding rough estimates from existing studies and using them as guides
for creating ranges of predictions is often the best one can do.”
4) Improving Water Allocation
The Central Valley Project Implementation Act (CVPIA) was passed in 1992, and designed to “increase
the efficiency of water allocation and improve environmental quality…in California.”
This section discusses water markets, and the provisions of the CVPIA. The CBO created a computer
model to analyze rainfall vs. the economics of water allocation. They found, in the end, that the “package
of CVPIA probably increases economic efficiency.” However, a problem with the model is the inexact
specification of monetary benefits for environmental protection. The dollar amounts were arbitrary, and it
is virtually impossible to measure whether the “$43.75 per acre-foot” in benefits to the environment
would ever actually be achieved.
Conclusion
This chapter was useful in illustrating what a goals/alternatives matrix looks like in practice, but the case
studies were so short and again, esoteric, that it was difficult to conceptualize the various policy choices,
with my own limited knowledge of each of the areas under discussion.
CHAPTER 15
Chapter 15 contains 4 case studies in which the Congressional Budget Office, referred to as
(CBO), uses the Goals/Alternatives Matrices, in a rationalist approach to conducting policy
analysis‘.
The rationalist approach (see chap 14) provides the framework for conducting a
comprehensive policy analysis. To apply the rationalist approach, heuristics, which is an
informal method to solve a problem rapidly, with a reasonable assumption that the results are
close to an optimal solution by having you predict and value the effects of each alternative on
every goal and every impact category relating to a goal, this guides the CBO’s analysis.
The Goal/Alternative Matrices serves as an organizational tally sheet which constructs a
simple matrix of result from the effect of each alternative on every goal and every impact. It can
structure a high volume of data and communicate this data in terms of the goals and alternatives
set by the client or analyst and the tradeoffs between the choices.
There are four examples of goal/alternative matrices used by CBO.
The CBO was selected to conduct the analysis because of its reputation for neutrality in
its research, its academic approach in analyzing a wide range of policy issues, conducting the
work without recommendations, thus increasing the objectiveness, and the ease of accessibility
to their reports on their website. www.cbo.gov, for those of you interested.
The first analysis involved the selling of radio spectrum licenses by the Federal
government. Starting with the Radio Act of 1912 the radio wave spectrum were declared
property of the U.S. government. There has been question over the best way to sell this
profitable commodity. In 1991 the committee on budget, hoping to decrease the national
deficient, requested the CBO to analyze the arguments for and against selling the licenses by
auctioning, lottery, or comparative hearings (the method currently used in which the specific
merits of each applicant are litigated, each applicant must establish minimum legal, financial and
technical qualifications and serve the public interest.)
The analyst decided to compare the three methods of sale, auction, comparative hearings,
and lottery in terms of three goals: efficiency, fairness and revenue. This created a 3 by 3 result
matrix, which compared each method of sale to each goal.
The first two goals efficiency and fairness, were qualitative, and simply summarized the
impact to the goal, but the authors of this article point out that if the CBO:
“established specific impact categories, such as the impact on access to licenses by smaller
financial interests and the extent of scarcity rent capture for taxpayers, this would have facilitated
clearer prediction and ranking.” So they felt that the CBO might of created too simple of an
analysis losing some definition of the results.
The third goal was revenues, which is a quantitative comparison. The lottery and comparative
hearings amounts were based on actual sales, while the auction was an in-house created basecase auction estimating a low and high value of range. They also analyzed estimations made by
other methods and studies to help create the base-case.
The analysis resulted in the Omnibus Budget Reconciliation Act of 1993, which
authorized a five-year experimental in auctioning licenses. Using a simultaneous ascending
auction in which a bids are made in rounds until no bidder wants to change a bid, this is
advantageous to people who want to obtain multiply licenses in an desired location.
In comparing the estimation in the CBO analysis to the actual auction of 3 nearly
equivalent licenses to those used in the analysis, brought in 6 bil apiece, while the high end of the
analysis was 5.7 bil. Using the rationalist approach and the heuristics method, organizing the
data into a goal/alternative matrices gave a fairly good estimation.
There is something refreshing about the academic approach to analysis, could this of been
used in the Philadelphia mental health case? It would seem, at the minimum, using this approach
gives you a base line to compare an interest groups’ analysis which tends to be slanted.
The second case study, ironically, involved the deployment of U.S. force in two conflicts,
simultaneously. The Subcommittee of the Senate committee on Armed Services requested the
CBO to examine alternatives to their plan of duel deployment.
Again, the CBO used the rationalist approach and the heuristics method, organizing the
information/data into a goal/alternative matrices. This matrix was much more in-depth than the
previous case study, it analyzed 5 options, the army plan and five alternative compared to a
baseline of the army’s 1998 guideline to deployment. These were compared by cost, deployment
time, conversion of national guard, armies from host nation, change in deployable forces, total
force structure.
In the CBO’s analysis, the army received a fairly comprehensive comparison of different
alternative to their plan or status quo. The strongest point of this method of analysis is the fairly
safe assumption that it is an un-bias, academic base, report which the client can use to make a
decisions only colored with internal bias’.
The third study for the CBO was requested by the House Committee on Budget. The
switch from analog to digital has created up to 6 times more space within a given bandwidth of
the electromagnetic spectrum for television programming. The purpose of the analysis was to
assess the revenues from selling licenses for the FCC spectrum. Past, planned, and future
auctions. Comparing each with numerous alternative plans for selling licenses.
The analyst compared the baseline, which was the status quo, and the five most
prominent alternatives. The alternatives were compared by auction receipts, economic
efficiency, and equity issues. As the report was about to be published, the FCC adopted a plan
which combined two of the alternatives. As a result, the 1600 television stations would receive
a second digital channel, with digital broadcasting to begin within 2 years and analog
broadcasting to cease by 2006. The broadcasting industry began lobbying Congress for
legislation which would override certain provisions of the FCC plan, which would likely means
the analysis of alternatives by the CBO will be utilized in the future.
A concerns from this
analysis was the use of previous studies to estimate gains, but as noted previously in case studies
and the basic definition of the rationalist approach and the heuristics method organized into a
goal/alternative matrices, which is, an informal method to solve a problem rapidly with a
reasonable assumption that the results are close to an optimal solution by having you predict and
value the effects of each alternative on every goal and every impact category relating to a goal
and are used to guide the application. Though this may create a high and low ranges, it still
furnishes the client with unbiased information to base a decision on.
The fourth case started with the passing of the Central Valley Project Improvement Act
of 1992, the Bureau of Reclamation had to implement policies which would increase the
efficiency of water allocation and improve environmental quality in the central valley project in
California. It also allowed for the sale of water from the agriculture sector to other uses.
A request from the House Committee on Resources to the CBO to conduct a study of the impacts
of the CVPIA, by conducting
1. a cost/benefit analysis of urban consumers of water transfer from agriculture into the water
market.
2. and the possibility of applying the same policies to other water projects.
The analysis showed that the CVPIA policies increased the economic efficiency. The
next issue of whether it should be applied to other projects was answered with a reccomendaton.
Since regions differ in sensitivity to changes, the CBO suggested that the BoR allow its
managers to select among the CVPIA provisions in reforming water allocations for their specific
projects.
The application of goal/alternative matrices gives an analyst a framework to organize
information and present their analysis in a concise and easily comprehensible form for their
client. To CBO’s own admission, the use of existing data and studies to create a more inclusive
measures of efficiency can lead to a wide range of values,
But in their own defense the CBO‘s says “finding rough estimates from existing studies and
using them as guide for creating a range of predictions is often the best one can do.”
Though taking into account past studies and experiences increases these ranges, this, in
combination with CBO’s own academic analysis, better defines the possibilities of the
cost/benefit ratios, and it gives the client a more complete analysis of the information for them to
make an informed decision. The CBO’s goal is not to make a decision for the client, but rather
supply them with unbiased structured information so they can make the decision on their own,
and using the Goal/alternative Matrices is a good tool to meet their goal and the clients needs.