UD-11

The legislature in a democracy refers to the set of elected individuals (legislators) who make laws according to procedures specified in the constitution. Consider how laws are made by a typical legislature. The legislators hold a meeting which is administered by a chairperson, who is elected by all the legislators. At the meeting, a legislator may propose a law by submitting a bill to the chairperson. Upon receiving the bill, the chairperson sets aside a time during which legislators who support it can speak in its behalf and opponents can speak against it. At a designated time or as the result of a vote, the discussion stops and a poll is taken in order to determine the number or percent who approve the bill. If the number or percent is greater than that specified in the legislature's or constitution's rules, the bill is passed. The percent usually chosen is a simple majority -- 50+ percent.

The U.S. has two legislative houses: the House of Representatives and the Senate. A bill must obtain a majority in both in order to become a law. Moreover, the U.S. president can veto legislation even though it has passed both houses. The legislature can override the veto, but only with a two-thirds majority in each legislative house. Thus, for a bill to become law in the U.S., there must be a kind of supra-majority.

A new law must be consistent with the constitution. The judicial branch can overturn a law if a majority of high court judges believes that it violates some provision of the constitution. In the U.S., the first federal income tax was declared unconstitutional because it included taxes on real estate and personal property, which the Supreme Court judges regarded as "direct" taxes. Direct taxes, according to the constitution, must be apportioned according to the population of the states. This provision was included in the constitution in order to prevent a redistribution of wealth from wealthier to poorer states.

The study of legislatures presents a serious problem for Public Choice. Economic theory shows that there are many possible market failures. Not only do many goods have public goods characteristics, the correction of market failures, such as natural monopoly and externalities, has public goods characteristics. Accordingly, economics teaches that the legislature in a democracy has a potentially important function. However, when real legislatures and government administrators are assigned to perform this function, they often fail.

One example is national defense expenditures. Much national defense spending has been shown to be wasteful. Items have been ordered that are either unnecessary or harmful to defense. Defense contractors have typically been able to earn higher profits than firms in other industries, suggesting that they have been overpaid. Contracts are often awarded to large campaign contributors or to firms located in voting districts that are represented by powerful politicians or pressure groups. And information from secret weapons’ research has been sold by bureaucrats and defense contractors to foreign governments and potential enemies.

Another example is the regulation of the market economy. Legislatures have often sanctioned monopolies, they have passed laws that cause external effects rather than reduce them, they have prevented buyers and sellers from freely setting the prices of traded goods and services, they have regulated the quality and character of products, they have interfered with intra-national trade and international trade, and they have disrupted the market economy with unpredictable fiscal and monetary policies. Such actions are sometimes the lesser of two evils. Economic theory shows that it is sometimes better to interfere with the market economy in one way in order to avoid a worse market failure. But government policies are often just the opposite of what the economist would recommend. In other words, they often cause the wealth of an economy to be less than otherwise, as viewed through the eyes of the ordinary person.

How can we explain the fact that legislators often make laws that cause or increase market failure rather than reduce it? We have already presented some fundamental (and indirect) explanations. These include campaign spending, the probable inefficiency of majority rule, and vote trading. Our aim in this chapter is to provide more direct explanations. To understand these we put ourselves in the shoes of legislators. We try to identify ways in which legislators can gain by passing bills that reduce efficiency.

Consider an example. Suppose that you own a large steel company and that you have been recently losing customers to cheaper foreign imports. Suppose further that you believe that by becoming a legislator, you could substantially increase the probability that the legislature would pass an import tariff on or a ban against foreign steel. Then it might be in your self interest to become a candidate so that, if you are elected, you can influence the vote. Or suppose that you are an experienced stock market speculator. Then you know that stock prices will be effected by government decisions. By influencing the vote, you can cause the price of a stock that you own to rise. Or, by finding out how other legislators will vote, you can use your inside information to make profitable stock market investments.

Informed members of the collective would try to have a constitution or laws that would make it difficult (costly) for people to profit directly from legislation that they help to pass. Indeed, U.S. legislators are not permitted to own companies or shares that enable them to gain from legislation. However, a legislator may be an agent for others. By agreeing to vote for legislation that benefits particular individuals or groups, a legislator can often obtain large campaign contributions to help him win an election. He also may be able to earn favors from beneficiaries for himself or family. Examples are free vacations, payments for invited lectures, employment for a family member, gifts of property, and so on. He may even be able to obtain bribes.

Legislators often find that they can serve their self interest by getting some laws passed even though they may reduce efficiency or cause market failure.

Thus, as Public Choice sees it, some laws get passed even though they may reduce efficiency or cause market failure. The reason is that legislators find that they can serve their self interest. They may be able to do this directly under some circumstances or indirectly by serving the interests of others who are willing to help them win an election and/or who are willing to give favors or pay bribes. The problem we face is to describe how this process works.

Before we begin, it is wise to make a few remarks regarding terminology. Writers on how legislators are influenced by outsiders often use terms like "special interests," "interest groups," or "pressure groups." Regarding these terms, we should recognize the following. First, every person who expects to be effected by legislation has an "interest" in it. To that person, the interest is special. Thus, the term "special" is redundant. It is nevertheless useful because it helps us distinguish individuals who aim to achieve their goals through political interaction (special interests) from those who aim to achieve them in other ways. (The term "special interest" is often used to represent an interest of which the writer does not approve. We should avoid using terms in this way.) Second, writers who use the terms "interest group" and "pressure group" ordinarily want their readers to focus on the influence of several or many people acting together, rather than on the influence of a single individual. However, because individuals have different amounts of wealth and are in different positions in the market economy, it is possible that a single wealthy individual will have greater influence than the combined influence of the members of some group. We shall study the group in Chapter Twelve when we turn our attention to pressure groups. In this chapter we make no distinction between the attempts by individuals to influence laws and attempts by groups.

In the following discussion, we use the term "pressure" to refer to a legislator's perceived consequences of the various tactics used by individuals to change the behavior of legislators. The most common of these are (1) offers to vote for (and implied threats to vote against) a legislator or for his party in the next election, (2) campaign contributions, and (3) bribes or favors.

Pressure on a legislator: net benefits perceived by a legislator of acting in one way or another due to the various actions taken by individuals to influence his voting choices in the legislature

In order to understand why legislators pass laws that do not meet the criterion of economic efficiency -- or why they pass any kind of law, for that matter -- we must put ourselves in the shoes of legislators and of those who try to influence legislation. The first step is to try to understand legislators' goals and their means of achieving them. Part two of this chapter discusses these goals, including the goal of serving the "collective interest." It also introduces the notion that Public Choice uses the analytical technique of treating legislators as functionaries. The second step is to identify pressures on legislators from the prospective gainers and losers. To understand such pressure, we must show how people can benefit or be harmed by the laws that legislators can make. This is done in part three. Chapter Twelve discusses the methods that can be used to influence legislators.

To understand legislators, we try to put ourselves in their shoes. To do this, we must try to understand their motives, the particular situation in which they must act (i.e., their “function”), and the external influences, or pressures, on them. In this part, we consider their motives and function.

Whatever specific aims a prospective legislator may have, she is faced with the stark reality that in order to achieve these aims, she first get elected.

Moreover, unless she plans to retire, an incumbent must try to get reelected. Moreover, if the incumbent is a member of a political party, she will ordinarily want to help the party. Otherwise, the other members of the party will not help her achieve her aims in the legislature. Public Choice theorists focus not on the legislator's primary goals, or preference, of a legislator but on her secondary goal of getting elected and/or of helping her political party.

To help us understand why the Public Choice theorist focuses on this goal, this subsection discusses various other goals, including income, status, power, and the "collective interest." We also consider the personal characteristics of individuals who seem most likely to become successful candidates.

It is possible that a legislator would have no goals that distinguish her from other job seekers. For the sake of argument, let us suppose that she is mainly interested in the salary. Under this assumption, in deciding whether to seek election, she would compare being a legislator with her best alternative income-earning prospect. She would try to become a legislator if she expected her income to exceed (a) the income she could earn from her alternatives plus (b) her costs of getting elected.

Consider the various ways that a person can earn income by getting elected as a legislator. The most obvious is the salary and various fringe benefits, including a retirement pension. In addition, she may be able to obtain gifts, travel invitations, favors, or bribes from others who expect to gain from legislation. If she is free to own whatever businesses or assets she wants, she may be able to use her law-making power to raise her income through profiteering (see Chapter Five).

A person who is elected as a legislator may also expect an increase in her income-earning opportunities after she completes her term, or terms, in office. Former legislators are in demand as business advisors, lobbyists, lecturers, book writers, and political analysts. The reason is that during her term in office, a legislator becomes acquainted with other lawmakers and learns about the way that laws are made. These acquaintances and information are valuable to individuals who want to pressure lawmakers, to predict future laws, and to provide insight to readers and viewers in the media.

Status is mainly a subjective concept. As a reason for choosing a job, it refers to what an individual thinks about how others view him. Some people may believe that the job of a legislator offers high status while others may believe that the job of teacher, shopkeeper, government bureaucrat, or auto repair mechanic offers high status. If a person regards status as important and associates it with being a legislator, she would choose the occupation even though it offers less pay and other benefits than its alternatives.

Government implies a monopoly over coercion. A legislator, by definition, helps to control the use of the monopoly. Thus, someone who likes having partial control over coercion is more likely, other things equal, to want to be a legislator. The power of any single legislator is limited, since she is only one member of a large group. Thus the desire for power is likely to be more important to someone seeking the office of chief executive than to someone wanting to be a legislator.

A particular legislator may have an assortment of other goals. These may be specific such as reducing crime, increasing women's legal rights, eliminating inefficiency in education, promoting national defense, and so on. Or they may be general such as reducing corruption and waste in government, balancing the budget, or reducing a nation's dependence on other nations.

Income, status and power are the three most probable goals of a candidate for the legislature. In order to achieve these goals and the other goals mentioned in the last paragraph, a candidate must first get elected. Thus, when a Public Choice theorist builds images of a candidate's action, he focuses on this goal.

Most incumbent legislators also aim to get reelected. But what about legislators who expect to retire from office? Such a person may have a variety of different goals. If he is a member of a political party and if he aims to help pass laws, he must help his political party. This is because, as we shall see, the political party performs the function of a vote-trading club. A legislator who did not help with the election of a successor would find it difficult to get cooperation from her fellow party members in passing bills that she favors. Accordingly, an incumbent is also likely to help the political

Public Choice theorists assume that the goal of a prospective legislator is to get elected. They assume that helping the political party is often the goal of an existing legislator who is planning retirement.

Different people face different prospects for earning income from being a legislator. Which kinds of people are most likely to become legislators for this reason? First, we can consider who is most likely to be able to benefit directly and indirectly. In democracies where direct profits are possible, we would expect businesspeople to want to become legislators. Where only indirect profits are possible we would expect those who have business associations and who can most effectively conceal the indirect income they earn to become legislators.

Second, consider who is likely to face the lowest costs of getting elected. It is evident that the costs of mustering the votes needed to get elected are likely to be lower for some kinds of people than for others. Examples are people who are particularly adept at identifying the center of opinion, individuals with pleasing personalities, and retired media personalities like actors and sports stars.

Third, we must recognize the uncertainty of income from public office. First, at the time a typical prospective legislator chooses to run for office, she cannot be certain that she will be elected. Second, if she is elected once, she cannot be certain whether or how many times she will be reelected. Assuming that an individual has more secure alternatives that are similar in other respects, she will try to become a legislator only if she is a risk taker. Of course, other alternatives, such as running a business, may also be risky. The risks must be compared.

People who seek election as legislators are more likely than others to know how to use the political office to earn income, to have lower costs of getting elected, and to be non-averse to uncertainty.

Thus different individuals are differently situated to gain from seeking election as a legislator. And different individuals are likely to gain in different ways from attaining that position.

Many people believe that legislators do or should serve the collective interest in the sense that they should serve the collective. If students of democracy have this belief, they are apt to get confused. There are at least three reasons. First the term "collective interest" defies definition. Some commentators define the public interest as the sum, or average, of individual interests. For such a concept to be useful, the interests of individuals must be knowable and there must be some way of summing them so that a legislator could tell whether his actions are in the public interest or not. If interests were relatively homogeneous, as they seem to be in some traditional societies, people would differ from each other only slightly and perhaps in only a few ways. Individual interests would be easier to know and something like a summation could perhaps be achieved and agreed upon. But the hallmark of modern democratic and capitalistic societies is diversity.

Second, legislators who want to be reelected ordinarily must cater to the center of opinion of the voters in their district.

A legislator who caters to the opinions of voters in other districts is unlikely to win reelection. In addition, as we saw in Chapter Eight, an optimal strategy for getting reelected may require pleasing campaign contributors. Thus, even if the collective interest was known, individuals who acted in it would have greater difficulty getting elected as legislators, other things equal, than those who did not.

Third, even within a given voting district, legislators must compete for reelection or they must aid the party. Where there are more than two candidates or parties, it may be worthwhile for a candidate to move away from the center, as we saw in Chapter Seven. This is especially true when the members of a collective have very dissimilar preferences, as they do in a heterogeneous society. Thus legislators often have incentives to cater to extreme views.

Why the assumption that legislators act in the "collective interest" is not helpful:

1. In a diverse society, the concept is impossible to clearly define.

2. In a representative democracy with voting districts, a legislator must please the voters in her district in order to get elected.

3. To appeal to the center of opinion strategy in order to maximize the probability of getting elected, a prospective legislator must often appeal to extreme views on issues.

4. To obtain the campaign contributions needed to persuade voters to favor her election, she must often support laws that will help particularly wealthy individuals or groups.

Finally, legislators can often raise the probability that they will be elected by obtaining campaign contributions. These contributions are used to persuade voters who otherwise might not support their election.

One of the great discoveries of economics is the idea that in order to help us think analytically about human interaction, it is useful to conceive of people who act in different roles and who perform functions. Economists speak of the function of the consumer, producer, and the resource supplier; and the role of the entrepreneur. The functionary producer is indifferent to the kind of product he produces and to whether the product is good or bad in a moral sense. He has a simple goal -- to maximize profit. He pursues this goal by hiring and purchasing resources under and then transforming them into a saleable product. In short, he receives no consumption benefits from producing a product and, before his decision to produce, he owns no resources. This abstraction serves several purposes. Our interest here is that it helps us separate the function of causing goods to be produced from the functions of (1) buying and consuming goods to satisfy wants and (2) supplying the resources needed for production. This, in turn, helps us focus on the producer as an agent, or entrepreneur, instead of on the particular people who choose to become producers. In other words, it helps us focus on the agency, or human action, that causes goods to be produced. We aim to relate this agency to the ultimate goal of consumption (satisfying wants) and to the various raw materials, hired employees, machinery, etc.

We know that producers in everyday life are not only producers in the functionary sense but also consumers and resource suppliers. They may receive consumption benefits from their producing. That is, they may especially enjoy or dislike the kind of work they do. And they may use their own labor, specialized skills, and property in production. However, by treating the producer as a functionary, we can separate our judgments about particular people from the effects that those people have on others. I may personally dislike a particular producer for a variety of reasons. However, I am able to see that in performing his function, a producer causes consumer wants for his product to be satisfied and resources to get employed. More generally, I may not like particular businesspeople but I must still acknowledge the consumer and employment benefits from business. We can think of the functionary legislator in a similar way. The legislator performs the function of causing public goods to be produced with citizen-voter tax money. In the simplest image of the legislator’s function, we disregard the other branches of government.

Two functionaries complement the legislators. The first are the voter and others who exert pressure. Their function is to elect legislators and to feel the benefits and harm of the legislators’ actions. The second is the bureaucrat, whose function is to carry out the directives of the legislator.

The ordinary legislator may expect consumption benefits from passing a law that causes a particular public good to be supplied. For example, she may be pleased that she can help to pass an anti-abortion law because she has sympathy for unborn babies. Or she may enjoy the status and power associated with being a public figure who people ask for help. Or she may feel that a particular law that she helps to pass is the "right one" in a moral sense. However, when we build an image of the legislator as a functionary, we assume that she pays no attention to these things. Just as we assume that the sole aim of the functionary producer is to maximize profit, we assume that the sole aim of the functionary legislator is to get reelected (and/or to help her party in the next election).

As in the case of the economic producer, the purpose for making this abstraction is to separate the function and agency of law-making in a democracy from the particular wants that any real person acting in the democratic legislator role might have. It also helps us recognize that regardless of our personal prejudices, the legislator must please voters and campaign contributors in order to realize her goals.

In building its images of political interaction, Public Choice treats the legislator as a functionary.

The legislator differs in an important way from the producer. With some caution, the economist can represent a producer's function as one of only providing benefits for the demanders of his good and the suppliers of the resources he uses. However, when the public choice theorist says that the legislator satisfies the demands of some members of the collective by helping to cause a bill to become law, he must add that she is likely to cause harm to other members. This is because high collective decision making costs lead citizens to demand representative government, in which a legislator can be elected even though she is expected to try to pass laws that are against the wishes of a majority of citizens.

Practically every legislative bill benefits some people and harms others. In choosing whether to support a bill, a legislator must calculate whether voters and campaign contributors are likely, in net, to benefit enough to enable her or her party to better compete in the next election. The legislator walks a fine line. To gain support from some citizens, she may shift her vote on a bill; but in doing so, she will lose the support of others. If she errs, she may lose the next election to a challenger. The threat of competition from challengers in the next election assures that at the margin of choice – where it is determined whether one more or one less unit of a public good will be supplied – there will be both gainers and losers.

The conflicting pressure on legislators, which is a necessary result of representative government, is faced by each separate legislator. Additional conflicting pressure arises if the voting population is divided into voting districts. There are many legislators and each wants to pass bills that benefit her voters and campaign contributors. We use the term constituents to refer to the voters and campaign contributors whose actions determine whether a particular legislator or party is elected. When different legislators have different constituents, any single legislator may support a bill that harms the constituents of another legislator. A legislator must be continuously alert in order to block bills that harm her constituents.

Constituents: the voters and campaign contributors whose actions determine whether a politician is elected.

In everyday politics, legislators propose bills that have nothing to do with public goods and market failure. In this book, however, we focus only on bills that attempt to deal with these economic problems. The purpose of this part is to identify a particular set of reasons why various bills cause not only benefits but harm. We can derive this set from what economists know about the nature of public goods and other market failures.

There are three possible ways to finance a government spending program: (1) taxation, (2) borrowing in ordinary credit markets, and (3) creating money. In this subsection, we consider each of these. Then we discuss the difference between broad and narrow constitutional powers to finance.

The usual way of financing government spending is taxes. There is a variety of different types of taxes: income, sales, property, tariff, and others. Economists have devoted a lot of energy to showing that different types of taxes have different effects on different people. In a comparison of two schemes, some taxpayers will practically always pay more under the first scheme than the second, while others will pay less.

Government borrowing in ordinary credit markets causes rates of interest to rise above what they would have otherwise been. This harms individuals who were planning to borrow in order to finance their spending; it benefits individuals who were planning to lend. The most important effect, however, is a shift of the tax burden to future taxpayers. If the legislature decides that it will pay the money back after one year, then next year's taxpayers must pay; if it decides to pay in installments over twenty years, then taxpayers for the next twenty years must pay; if it postpones repayment of the principal indefinitely and only promises to pay interest, taxpayers each year throughout the indefinite future must pay in the form of interest charges.

There are three means of financing government spending: (1) taxation, (2) borrowing in ordinary credit markets, and (3) creating money. Because each of these has different effects on different individuals, individuals have an incentive to pressure legislators to choose policies that benefit or are least harmful to them.

Creating money can occur directly if the government owns the printing presses used to produce money. However, money is usually created through a nation's central bank. Government officials seldom authorize the central bank to simply print money and hand it over to the government. The more common procedure is for the central bank to write checks on itself in order to pay for goods and services that the government buys. Because the central bank regulates the commercial banks and because it allows the banks who possess such checks to increase their loans, the banks accept them in deposit in order to increase their interest revenue. Thus, government purchasing agents can use what is essentially newly-created money to buy goods and services. Creating money causes the average level of prices to be higher than it otherwise would have been. The burden of this is felt mainly by those who had made plans on the basis of the assumption that prices would not rise or not rise by so much. There is also a differential effect on different people due to the fact that different prices rise to different degrees.

A constitution may permit a legislature to have broad powers to distribute the finance burden. Or it may permit only narrow powers. At the narrow extreme, the collective may impose strict constitutional limits, such as a requirement that each member of the collective pay an equal share of the cost of various government projects regardless of their property, income, etc. It may also prohibit government borrowing and money creation. At the broad extreme, the constitution may permit legislators to decide which kinds of taxes they will impose and on whom. At this extreme, legislators could tax any individual any amount and according to whatever criterion. For example, they might tax property, income, sales, output, imports, or some combination. And they might discriminate on any basis they choose, including race, sex, nationality, etc.

Legislators in most democratic countries have fairly broad powers. In the U. S., for example, they can tax practically anything or any action. Moreover, they can grant deductions and exemptions for such things as old age, disabilities, payments for child care services, payments for education, interest on government bonds, contributions to charity, housing investment that reduces energy consumption, employment of minority labor, medical expenses, and so on. The principal limitation is that taxation cannot discriminate directly on the basis of race, sex, religion, or other personal characteristics. The U.S. government faces some political pressure to maintain a relatively balanced budget and to control inflation. However, there are no constitutional limitations. When a legislature has broad powers to distribute the finance burden, there is a high incentive for individuals to try to pressure legislators to alter the distribution of the burden in their favor.

We see, then for every financing scheme, some people benefit and some are harmed relative to some other financing scheme. It follows that some individuals practically always have an incentive to try to reduce their burdens by pressuring legislators to adopt some other scheme.

If a legislature has broad powers to decide how the tax burden is distributed, individuals will have large incentives to pressure legislators to choose distributions that are least harmful to them. Such incentives are smaller if the legislature has narrow taxing powers.

If the constitution gives only narrow financing powers, members of the collective will have a relatively small incentive to pressure legislators. For example, consider a constitution that specifies that everyone must pay an equal share of the total tax bill, that the government must maintain a balanced budget (it cannot borrow), and that the government cannot borrow from banks, including a central bank.

Then a person would have no incentive to try to reduce his share of the finance burden by pressuring a legislator. He might, however, promote a change in the constitution.

All of our discussion of voting, the legislature, and political parties up to this point has assumed the existence of pure public goods. Although this assumption helps us understand quite a bit about democratic government, only a small subset of legislative decisions relate to goods that are close to being pure public goods. There are really just three types of government services that may qualify as pure public goods: (1) national defense, narrowly defined, (2) protection of life, limb and liberty against foreign encroachment on national boundaries, and (3) enforcement of private property rights, including contracts. Even these services are not, strictly speaking, pure public goods. In fact, legislators spend most of their time and energy dealing with impure public goods -- goods that may benefit some subset of the citizens but not others. Indeed, many services that are supplied are harmful to some people. In this subsection, we consider two types of impure public goods: local public goods and club goods. The fact that legislators pass laws relating to impure public goods seems to be the most important reason why individuals try to influence legislation.

Many public goods are local public goods. A local public good is a public good with a geographical range limitation. Examples are fire protection, most police services, education, parks, roads, bridges, and sanitation.

Local public goods benefit some people in a particular locality but not other people in other localities. If members of a collective want to minimize the resources used to try to pressure legislators, they should turn over the task of deciding on the supply of local public goods to local governments. The local politicians should be given the responsibility of deciding whether such goods should be publicly supplied, to collect taxes and to disburse the funds. Local legislators will only be pressured by local demanders and local taxpayers. If the national government supplies the good, non-beneficiaries will have to share in the payment. This gives local citizens, as free riders, an added incentive to pressure legislators to pass laws to supply the good. Besides, if local citizens must pay the cost, they will have a greater incentive to monitor legislators and the bureaucrats who are charged with supplying the goods.

Some local public goods actually cause harm to some people. The most obvious example is the deterrence of so called "victimless crimes," like drug use, pornography, and gambling. Although such deterrence yields benefits that are both joint and nonexcludable to the people who do not like these activities; it harms consumers and producers of the deterred activities. Because of the opposing demands, the propensity to try to pressure legislators is strong on both sides.

Because the supply of local public goods by local governments benefits some people and harms others, individuals have incentives to pressure legislators to supply goods that benefit or are least harmful to them.

Sometimes there is no local government. This is often because the national government has imposed impediments to forming one. If so, the impediments should be removed.

Suppose that there is no local government and no prospect for forming one. If a local public good is to be supplied at all, it must be supplied by the national government. To supply it efficiently, the national legislature would have to find the quantity at which the marginal collective benefits equal the marginal cost. Obviously there is no reason to expect that the legislature would be motivated to do this or that it would be successful at finding the optimal quantity even if it was.

Legislators' lack of knowledge is like an invitation to try to influence legislation. Each local public good has beneficiaries who would like to persuade national legislators to pass a law authorizing its supply. Non-beneficiaries, of course, would oppose this in order to avoid a higher tax burden. One way to limit efforts to influence legislation of this type and the corresponding use of resources is to require the residents who live in the locality where the local public good is provided to pay the additional taxes needed to finance the good.

When local public goods must be supplied by national governments, legislators will be pressured by local demanders of the goods, by suppliers, and by those who pay for the goods.

Legislators may also be pressured by suppliers who want to profit from supplying the local public good. To assure that residents would not have to pay for local public goods that they do not want, the law (or constitution) could require that they approve the decision, by referendum, before it can be implemented.

In short, the supply of a local public good by the national government could be made subject to two restrictions: (1) local taxpayers must completely pay for the local public goods by means of special taxes and (2) special taxes cannot be imposed unless the taxpayers agree by means of a referendum.

Suppose that all local public goods are supplied by local governments. It is possible that the range of a given public good would be larger than the jurisdiction of the local government. Or the supply of a public good in one jurisdiction may cause harm to people in an adjoining jurisdiction. In economic jargon, we say that the first case is a local public good with a positive spillover and the second is a local public good with a negative spillover. In these cases, the national government may play a role by brokering a cooperation or compensation plan between local governments or between governments and citizens. It may also order that compensation be paid or it may impose taxes and give subsidies itself. Finally, it may take over supply of the good. Each case is different. Accordingly, the optimal solution varies from case to case.

Local public good spillover: the supply of a local public good in one local jurisdiction yields harm or benefits to individuals outside the jurisdiction.

Assuming that the national legislature adopts the task of dealing with spillovers, individuals will have an incentive to pressure legislators. Suppose that your district is causing negative spillovers to an adjoining district. For example, users of a river in your district may cause downstream pollution to members of an adjoining district by disposing of their waste in the river. In the usual economic analysis, the national government may try to correct this inefficiency in several ways. First, it may order your district to pay taxes to the national government based on its assessment of the amount of the spillover. Second, it may order your district to compensate the people of the adjoining district. Third, it may pay your jurisdiction to cut back or change its method of production in order to reduce the spillovers. Fourth, it may do nothing, expecting the adjoining district to negotiate a settlement with your district. Given these alternatives, the people in your district would have an incentive to pressure legislators to either adopt the third remedy or to do nothing. People in the adjoining district would have an incentive to pressure legislators to force your district to pay compensation or to cut back on the pollution.

When there are spillovers in the supply of local public goods, individuals in the districts have incentives to pressure legislators to choose policies that benefit or are least harmful to them.

It would be possible to specify in the constitution that the courts, as opposed to the legislature, would have the responsibility to deal with problems of spillovers. The courts could use common law principles or general principles that were set out in a body of civil law. The courts would have the task of determining who is harmed by a negative spillover; whether they should be compensated and the size of the compensation; and whether the producer of the spillover should be forced to stop the action that causes it. In the above example, this would mean that the main alternatives available to the downstream users would be to sue the upstream polluters and to seek an injunction to block the polluting acts. Such a constitutional provision would eliminate the incentive to pressure legislators in this case.

It is important to distinguish between public goods that have a range limitation and club goods. Typical examples of club goods are a movie, swimming pool services, long-distance highways, bridges, international airports, and a power plant. Club goods are goods that have the jointness characteristic in some measure but not the non-exclusion characteristic. Beneficiaries can be excluded at a relatively low cost.

For both a local public good and a club good, some people are excluded because they live too far away. For the club good, however, even local people can be excluded at low costs if they do not pay an admission or user fee. The costs of excluding consumers from a local public good are high.

Club goods: goods that have the jointness characteristic in some measure but not the non-exclusion characteristic. Beneficiaries can be excluded at a relatively low cost.

Many club goods are supplied without government intervention. Private individuals build theaters, night clubs, mountain retreats, swimming pools, amusement parks, health clubs, schools, and so on because they believe they can earn a profit by selling services to consumers. They limit access and charge a club membership and/or admission fee. Typically, people must go to a specific place to enjoy such goods. Because some visiting times are more desirable than others, there is sometimes a crowding, or congestion, problem. On the other hand, there are typically times when the services are under-used. Recognizing this, club managers limit admission or charge extra fees in order to avoid crowding; and they give special discounts during off-peak periods.

To attain complete efficiency in the supply of club goods, suppliers would have to establish all clubs for which the collective benefits are greater than the costs. Moreover, because the benefits of a club are joint, different members would have to pay different prices at the margin. In addition, the user fee schedule would have to reflect the different levels of demand at different times. Such complete efficiency is impossible to achieve because it would require the club manager to have complete knowledge of demands. Like the case of pure public goods, high-demand members do not ordinarily want to reveal high demands if they believe that doing so will cause the manager to charge a higher user fee.

Because complete efficiency is impossible, it might be thought that local governments should supply a club good. However, there are two reasons to be wary of this idea. The first is that the incentive of a private entrepreneur to act efficiently is likely to be greater than that of a government manager. Because the costs of excluding consumers are relatively low, the supplier of a club good has an incentive to discover and charge efficient prices. His incentive arises because he knows that if he is successful, he can earn a profit. Moreover, private entrepreneurs have incentives to identify new club goods and to stop supplying existing ones when demand falls. The same kind of incentives do not exist for a government official, who receives a fixed salary. Second, the constitution, laws, or political pressure may make it impossible or unwise for a government manager to discriminate in price even if she wants to. When a club good is supplied by a government agency, the pricing policy is largely determined by politicians. This means that it becomes subject to all sorts of pressures that have nothing to do with efficiency.

Individuals may avoid having to pay a private entrepreneur for club goods by joining together in a club themselves. A club is like a mini-government. Its members elect an agent or agents to act in their behalf. The difference is that while an ordinary government relies on coercion to raise the money needed to pay for its services, a club relies on agreement. The agreement may consist of a written contract, as in the case of a person moving into a community that contains a homeowners' association. Or it may be informal, as in the case of a local travel club.

Efficiency, Pressure, and the Division Between Club Goods and Local Public Goods

Ordinarily, club goods should be supplied in the market by private entrepreneurs or by non-government clubs. Local public goods should be supplied through a government (usually a local one), if it is efficient to do so. But it is often not easy to tell whether a good is a club good or a local public good. There is no clear division between them for the simple reason that the costs of excluding demanders vary along a range from being very low to being very high. There is no magic division between low and high. As a result, legislators are faced with a problem of judging the height of exclusion costs or, more simply, whether a local government ought to take control and supply the good.

The difficulty of determining the height of exclusion costs means that legislators in a local democratic government will always face pressure from consumers of club goods to include those goods in the class that the government supplies. People who would otherwise have to pay for a club good have an incentive to pressure legislators to vote for its supply by the government, provided of course that their own taxes do not rise to a point that is greater than their expected benefits. On the other hand, individuals specialized in the private supply of the club good would have an incentive to pressure legislators to refrain from supplying the good, unless the specialists expect to be hired by the government as suppliers.

Due to the difficulty of determining the size of exclusion costs, legislators are likely to feel pressure from beneficiaries to supply club goods and from private suppliers of such goods not to supply them.

We should recognize one other factor when considering the tradeoff between the private and government supply of club goods. The height of exclusion costs is not fixed. Accordingly, the technology might change, making what was previously a local public good a club good or vice versa. The very act of supplying the good through a government bureaucracy is likely to inhibit the development of exclusion technologies since government supply will reduce the incentives of private entrepreneurs to develop such technologies.

Given that the constitution permits it, legislators can change the distribution of wealth. They can tax some people and give the proceeds to others. This encourages people to try to obtain redistributional benefits at the expense of those who must be taxed to pay them. In the U.S., the largest redistribution program today is the social security system, including its medical benefits. Generally speaking, young people pay taxes and older people receive the benefits. It is not surprising that the American Association for Retired Persons has formed. It enables beneficiaries of the redistribution program to increase their pressure on legislators.

Another large redistribution program in many countries is the price support program for farmers. In this case, farmers' benefits come not from taxpayers but from consumers who must pay higher prices for food.

Naturally, farmers have incentives to try to pressure legislators to pass price support programs and to increase the amount of support that is offered. Consumers have incentives to try to prevent such laws from being passed.

Individuals have incentives to pressure legislators to cause wealth redistributions in their favor and to block distributions that are against their favor.

It is important to realize that redistribution programs may entail substantial administration costs. To isolate these costs, David Friedman has invented a parable:

Special interest politics is a simple game. A hundred people sit in a circle, each with his pocket full of pennies. A politician walks around the outside of the circle, taking a penny from each person. No one minds; who cares about a penny? When he has gotten all the way around the circle, the politician throws fifty cents down in front of one person, who is overjoyed at the unexpected windfall. The process is repeated, ending with a different person. After a hundred rounds, everyone is a hundred cents poorer, fifty cents richer, and happy.(Friedman 1989: 70, as quoted by Mitchell and Simmons 1994: 70).

The size of the administration costs in a particular case depends on the circumstances. Fifteen to twenty per cent seems to be a conservative estimate for the typical program.

Common property refers to property that is not owned by anyone. Hume's meadow is an example. The problem here is that the incentive to improve the resource (drain the meadow) is weak relative to the collective benefits of improving it. A more contemporary example is "clean" air. Common property resources that are scarce tend to be over-used. When an individual uses the resource, he considers only his own benefits and costs. He disregards the reduction in benefits that others must feel. Other examples are an unowned fishing lake or sea and a popular government-owned city park or beach that has no admission fee and no regulations.

Let us consider the case of clean air. Legislators can use a variety of means to improve the air quality in a polluted city. They can make special laws prohibiting or limiting some types of pollution; they can impose taxes on high-polluting businesses, fuels, and vehicles; and they can even create special rights to pollute which the laws allow owners to buy and sell in markets.

Each of these methods is bound to give benefits to some people and to impose costs on others. Since legislators cannot know true demands, members of the collective who expect to gain or lose from each method have an incentive to try to pressure them.

Often the government policy is both the source of inefficiency and a source of incentives to influence legislators. A government-owned beach is an example. If a private company owned a popular beach, it would charge admission in order to avoid the overcrowding, or congestion, inefficiency. It would charge a high price during holidays and weekends and a low price at other times. Government officials, however, are likely to charge the same price at all times or at least to be inflexible in their pricing policies. The result is congestion inefficiency. Another aspect of efficiency is the choice of how the resources should be used. Because private property is saleable, a private owner has an incentive to employ the property in the most efficient market use. If consumers came to value the beach more as a site for a high-rise condominium amusement park than as a place for swimming and sunbathing, a private company would have a profit incentive to build the condo or to sell the land to an condo builder. Government officials have little incentive to use or dispose of government-owned resources efficiently, from the standpoint of consumers.

Regarding incentives to pressure legislators, if the beach was owned by the government, citizens would have an incentive to try to pressure legislators to adopt particular policies that affect the quality and range of beach services. For example, one group of people may want a beach that contains many shops, while another group may want a beach on which shops are prohibited. Each group would have an incentive to pressure the legislature to command the administrator to adopt policies that the group members favor.

Individuals have incentives to pressure legislators to manage government-owned resources in their favor. Because different individuals have different wants, these pressures are often in conflict.

Once a decision is made to supply a public good, legislators must choose how it will be supplied. There are several possibilities. They may use an existing administrative agency or create a new one. In either case, the legislative bill will contain a provision authorizing that money be paid to the agency. It may specify that the agency must supply the service itself, that it must contract out the work, or that it should use the funds to subsidize demand.

If the bill authorizes the agency to supply the service itself, it may go on to specify that new workers hired must represent a cross-section of the population, that they must pass qualifying examinations, that they must be certified by some other government or non-government agency like a university, that preference must be given to disadvantaged workers, and so on. Each of these alternatives has particular effects on individuals and therefore provides incentives for the individuals to either promote or demote the legislation by trying to pressure legislators.

The possibility of causing public goods to be supplied in different ways gives individuals incentives to pressure legislators to adopt methods that benefit them and to avoid methods that harm them.

Another case is that of contiguous property. This includes property needed for the construction of long-distance highways, bridges and airports. We discussed this in Chapter Three. Some of the owners of property have an incentive to hold out for a high price. Such behavior raises the costs of ultimately acquiring the needed property. In such cases, the government may appoint an appraiser and pay property owners the appraised value plus some premium.

The owners of such property have an incentive to try to influence the price that is ultimately decided upon. If the legislature decides the price, the owners will try to persuade legislators to choose a high price. If the legislature hires an appraiser, they may try to persuade legislators to use an appraiser who they expect to be more favorable to them than someone else.

In the following we consider three other types of market failure: monopoly, natural monopoly, and externalities. The kinds of policies that economists recommend to correct for each of these were discussed in Chapter Three. The student whose knowledge of economics is limited might wish to review that discussion before continuing. We need not discuss the externality problem because, as pointed out in Chapter Three, the relevant cases are covered under the category of the common property resource, which we just discussed. However, a special problem sometimes results from peoples' failure to distinguish between real externalities and pecuniary externalities. Thus, we shall discuss this issue. We also deal with the case where the externalities are caused not by individuals in the market economy but by government agencies.

The problem of ordinary monopoly arises when otherwise competing owners of a specialized resource or ability decide to collude for the sole purpose of raising prices. The solution is to break up the collusion. Obviously, the colluding firms would lose from such a policy, while consumers would gain. Both the firms and consumers have incentives to try to pressure legislators to make a law in their favor.

In the U.S., the legislature has passed laws against collusion and related monopoly practices. It went on to create a special agency (the Antitrust Division of the Justice Department) to prosecute suspected violators in the courts, while also giving individuals the right to collect damages in civil suits that judges ruled were due to collusion and other monopoly practices. Because it is often difficult to distinguish between normal competitive business tactics and monopoly practices, such laws have occasionally given organizations of small firms incentives to pressure the agency to deter larger firms from using normal tactics of market competition. Larger firms, fearing that their bigness will attract a suit by the Antitrust Division or even by private parties, have sometimes been reluctant to compete fully with the smaller firms. Since legislators and the Chief Executive can influence the decisions of the Anti-trust division to prosecute, they can use the threat of enforcement to attract campaign contributions from larger firms whose practices might be deemed to warrant prosecution.

And in an environment where goods have traditionally been supplied by small firms, smaller firms can sometimes rally voter opinion against the larger ones.

The patent monopoly is a solution to the problem of providing incentives for the discovery of new products and methods of production. Individuals and firms that are research-oriented have an incentive to persuade legislators to pass a patent law and to extend the legal life of the patent. After the discovery, consumers and potential competitors have an incentive to try to have the patent law abolished or to reduce the legal patent life. Firms that are specialized in copying potentially patented products or methods of production from other countries have an incentive to pressure legislators not to extend patent protection to other firms and especially to foreigners. A similar argument can be made about the monopoly due to a copyright law.

Private electricity supply companies and water supply companies are usually cited as examples of natural monopoly on the grounds that the costs of supplying the second customer is less than the cost of supplying the first, the cost of supplying the third is less than the cost of supplying the second, and so on. The natural monopoly is inefficient for two reasons. First, because it is a monopoly, it charges a monopoly price. This leads some economists to demand price regulation. Second, because of decreasing marginal costs, the monopolist can only produce and sell an output at which price equals marginal cost if he can charge low-demand buyers lower prices than high-demand buyers -- that is, if he can price discriminate precisely. But this is ordinarily impossible or too costly for him to do. Economists who do not think about government failure recommend a two-part solution to this problem: (1) price regulation and (2) a subsidy to encourage the monopolist to sell at a price that would otherwise cause him to incur a loss. The subsidy must be financed in the same way as other spending -- by taxes, borrowing, or creating money.

It is obvious from our discussion so far that the second solution -- the tax subsidy plan -- is like an invitation for individuals to try to pressure legislators. A regulated price is also like an invitation to the concerned parties to try to influence either the regulatory agency or the legislators themselves. On the one hand, the monopolist has an incentive to pressure for a high price and high profit. On the other hand, consumers want lower prices. They have an incentive to pressure the regulatory agency or legislators to take actions that will reduce prices.

It is often believed that consumers and a regulated monopolist are opponents in a zero-sum game of influence. For the most part this is true. The monopolist has an advantage due to the high costs of transactions to consumers. However, one should also recognize that a price that is too low will drive a monopolist out of business. Consumers would be foolish to demand prices so low that they deter producers from supplying.

Practically all countries try to regulate the prices of various services in their transportation and communication industries. The suppliers of such services are often not monopolies and in cases where they are, the monopoly is either the result of a special privilege or temporary. If supply would otherwise be competitive, the decision to regulate does not promote efficiency; it reduces it. In addition, it gives the otherwise competing firms an incentive to join together to pressure legislators to raise price. If the firms are successful, they can cause the price to be higher than it would have been if there was no regulation in the first place.

Besides wanting a higher price, existing firms may also want to exclude new competitors in order to maintain their sales and to reduce the pressure on service quality.

Consumers often do not realize that price regulation is unnecessary and even harmful in a competitive market. Suppose that regulators are successful at reducing the price below what it would have been in a competitive market. Then either (1) some suppliers will drop out of the market and there will either be a shortage of the service or (2) suppliers will reduce service quality. Suppose, for example, that price regulation causes the price of private busses, trains, subways, roads, bridges, or telephone lines, etc. to be reduced below their competitive rates. The result will be shortages, overcrowding, long queues, and perhaps bribes to service providers to break the law.

Because the regulation of monopoly affects producers and consumers in opposite ways, both groups have incentives to pressure legislators to regulate it in a way that benefits them.

Every action in a market economy causes harm to someone in the sense that it at least deprives someone of opportunities that he otherwise would have had. This is because of the enormous interdependence that exists in a market economy. Suppose that a company invents and successfully markets a new and superior product of a given type. It will make a profit and take customers away from other companies. The other companies will either be forced to produce the new product or to scale back their production due to reduced demand. If you are a worker in a company that is scaling back, you may be laid off. You might claim that the invention caused external harm to you.

Pecuniary externality: the harmful or beneficial effect of another person's action in the market economy. The effect is felt in the form of a price change or output adjustment if prices changes are difficult to make.

We say that this harm is pecuniary because, in a free market economy, it would effect you by means of price changes. If you were free to reduce your wage rate (the price of your labor), you could probably keep your job by offering to work at a lower wage. The pecuniary externality is the harm you feel due to the fact that the new invention reduces the wage you could earn in your existing job. If you cannot reduce your wage demand or if you choose not to, the pecuniary externality will be in the form of a layoff. A similar pecuniary externality is felt by the company owners. These people may choose to reduce price in order to sell the same quantity as before or to cut back their production.

Legislators may make laws to alleviate harmful pecuniary externalities. Examples are unemployment compensation laws, restrictions on laying off employees, and the use of taxpayer funds to subsidize declining businesses. The prospect of getting such laws passed is an invitation to individuals to pressure legislators.

Economists typically argue that laws of this type are not a means of correcting for a market failure but a means of causing it. In other words, such laws cause inefficiency, since they reduce peoples' incentives to invent and/or because they delay or block adjustments to change. Public Choice adds that such laws cause resources to be used in an effort to pressure legislators.

Government programs often have real (or non-pecuniary) external effects. Consider the construction and operation of transportation systems, like roads, railroads, and airports. Some people are bound to be harmed by various forms of pollution or congestion. Another example is the setting aside of an area for a garbage dump or hazardous waste disposal.

The problem faced by legislators in cases like these is typically threefold. First, because of the external effects, they must add a calculation on the costs side of their balance statement. Thus, they must estimate the external cost of the congestion or pollution. Second, they must choose where to locate the service that is expected to cause the external effects. Third, they must choose a level of compensation for those who are harmed. (Of course, they could choose zero.) Each of these elements can be a source of pressure on legislators. If people have hope of being paid compensation, they will pressure legislators to pay it and to make a high estimate of the external costs, at least so long as the high estimate does not jeopardize the prospect that the service will be located in their region. On the other hand, those who stand to benefit from the service, as well as taxpayers, may urge legislators to disregard the costs of the external effects, since otherwise they will have to pay the compensation in the form of higher taxes.

The leaders and citizens of most countries today take it for granted that one of the important functions of government is macroeconomic policy. An important reason for this appears to be the economics curriculum at universities, which requires courses in macroeconomics and macroeconomic policy. These courses were added to curricula developed in the 1950s. At that time, it was widely believed that unless the correct macroeconomic policies were followed, economic growth and development under the market economy would be accompanied by substantial unemployment and periodic economic depressions. Even before the 1950s, the U.S. legislature passed the Employment Act of 1946, which gave authority to the President to take measures to maintain a low level of unemployment and to promote economic stability and growth. The macroeconomists of the 1950s believed that the President had two means of achieving these objectives. The first is fiscal policy, which is a policy of deliberately causing either deficits of taxes over government spending or a budget surplus. The second is monetary policy, which is the policy of changing the quantity of government-controlled money. The President must work with Congress to carry out fiscal policy. However, he has some independent power to change the quantity of money because of his influence over national bank (Federal Reserve System) policy. In the first macroeconomics textbooks, macroeconomists built crude models that aimed to show how monetary and fiscal policy affect unemployment and inflation.

Fiscal policy: deliberately causing either deficits of taxes

over government spending or budget surpluses.

Monetary policy: deliberately changing the quantity of

government-controlled money.

Notwithstanding the fact that macroeconomics continues to make up part of the degree requirements of modern economics departments, there is today serious doubt about whether this whole enterprise was sensible. First there is doubt about whether a real economy can be modeled. Second, there is doubt about whether statistical data on the aggregate variables that are modeled is suitable for helping us judge whether the models are relevant and, therefore, whether the fiscal and monetary policies can achieve the objectives claimed by the early macroeconomists. (Brenner 1994) Third, public choice scholars and others have argued that the main reason why governments have been eager to use fiscal and monetary policies has nothing to do with macroeconomics. They argue that the long history of budget deficits and money expansion beginning in the 1960s supports the Public Choice view that incumbent politicians and bureaucrats have incentives to cause the amount of government spending to rise. (Buchanan and Wagner 1977; and Wagner 1980). It would be an understatement to say that the most authoritative of today’s economists disagree widely over the appropriate macroeconomic policies to follow, if any. It is sufficient here to note that a president and legislature which have the authority to run budget deficits and to control the quantity of money are in a position to provide all sorts of benefits for his political party and for particular pressure groups. Opposition legislators, on the other hand, feel pressure to limit this authority and its exercise in the short run. In the long run, the opposition legislators have an incentive to gain control over it for their own purposes.

1. Define legislature, status, constituent, local public good, spillover, club good, common property resource, pecuniary externality.

3. Legislators often pass laws that economists believe decrease economic efficiency rather than increase it. From the Public Choice point of view, how can we explain this?

4. Describe the tactics that individuals can use to influence legislators’ decisions.

5. For what kinds of jobs are politicians especially suited after they leave office?

6. According to the text, if we assume that legislators act in the collective, or public, interest, we are likely to get confused. Give three reasons why.

7. Legislators do not ordinarily try to cater to the center of opinion in the nation. Tell why, according to the text.

8. In Public Choice we define the legislator as a functionary. How does the functionary legislator differ from a real legislator?

10. Give an example of someone who has an incentive to influence the legislature's choice of characteristics of a public good.

11. Who benefits and who is harmed by a policy of financing government spending by means of borrowing?

12. Who benefits and who is harmed by a policy of financing government spending by means of money creation?

13. The incentive of individuals to influence legislators depends, other things equal, on whether the power to finance is broad or narrow. Explain by giving examples.

14. Tell two benefits of having local public goods supplied by local governments that have taxing and spending power.

15. According to the text, if there is no local government, a national government can supply a local public good. But the national government's power to pass laws should be subject to two restrictions. Name these restrictions and tell the rationale for each one.

16. Suppose that local public goods are supplied by local governments. If spillovers exist, individuals may have an incentive to influence legislators. Describe a spillover and tell how people in different districts can expect to gain by influencing a legislator.

19. A club good can be supplied by a private entrepreneur or by a government agency. Which is likely to be more efficient. Explain.

20. A club good can be supplied by a private entrepreneur or by a government agency. Compare the pricing policies of the two by considering the incentive of the respective suppliers.

21. Tell how the legislature's power to pass laws to supply club goods can provide an incentive for an individual to pressure legislators.

22. Give an example of a club good can be supplied through the market. Now assume that the same good is supplied by the government. Compare the market supply with the government supply. Tell which you would expect to be more efficient and why? You should take into account the effects on incentives.

23. Tell how the legislature's power to pass laws to deal with the common property resource problem provides an incentive to influence legislators. Give an example that is different from that used in the text.

24. Give an example of someone who can benefit by attempting to influence the legislature's decision on the method used to supply a government-provided service.

25. Give an example of someone who can benefit by attempting to influence the legislature's decision regarding the purchase of contiguous property.

26. In the absence of government intervention, transportation services would be supplied by competitive firms. Suppose now that legislators decide to regulate the price to consumers of some type of transportation service. Assuming that the people who are effected try to influence legislators to change the price, what are the likely effects from the standpoint of economic efficiency? In other words, is economic efficiency likely to be increased or decreased by the efforts of the people to influence the legislators. Why?

27. If a democratic legislature is permitted to make laws that deal with pecuniary externalities, it is likely to cause economic inefficiency and efforts to influence the legislature. Use an example to show both the inefficiency and the efforts to influence.

28. Give an example of a government externality and of an individual who would try to influence legislators to change it.

Gunning’s Address
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Taiwan, R.O.C.
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