No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Thirteen: Market “Failure” and the Role of the Government 316 Lyndon Johnson took aim at poverty in his first State of the Union address, there has been an increasingly strong crosscurrent: The government is redistributing wealth up, too - especially in the nation’s capital.” - Reuters, Deborah Nelson and Himanshu Ojha (2012) While these results may be discouraging, they shouldn’t be too surprising when you apply economic reasoning. In the next chapter we’ll study public choice theory and learn why you don’t have to be a cynic to understand that public policy may have unintended consequences.We will learnwhy political incentives often drive this type of perverse outcome. One final note concerning government “Robin Hood” policies: we need to be extremely careful not to base our political decisions on what is often called the politics of envy. Not only is envy one of the seven deadly sins, it is repeatedly condemned by God in the Bible. Further, we know that God often provides material blessings to hard work, and he promises that ill-gotten gains do not last (Proverbs 13:11 ). We have a sovereign God— he will make things right in his own due time. Never forget that the sinfulness of our own hearts (Jeremiah 17:9 ) may confuse our ability to understand what God requires. Remember, he is not “ just like you” (or me for that matter!). IT’S A WRAP! In this chapter we’ve seen how markets may not provide a socially optimum quantity of output. With a lack of competition, markets may not produce all output which consumers value more than the cost of production. Further, poorly defined property rights may create externalities, with markets overproducing products that have negative spillover benefits, and underproducing products with positive benefits. Public goods— those that are non-excludable and non-rivalrous—may be underproduced if markets cannot overcome the free rider problem. All of these so-called “market failures” may— and the key word is may—mean that government provision could lead to a socially improved outcome. Nevertheless, we have learned that simply because it is conceptually possible that government action in markets can lead to an improved result does not mean it will lead to a better result. In this chapter, we focused on the ability of government planners to know what the optimal amount of a given product should be. Markets use prices to guide entrepreneurs to correct production decisions; there is no analog for government planners. How will they know what they should do? But this is not the only issue. In this chapter we’ve granted that government officials may be angels, focusing on whether they have the capability to plan the economy or regulate it in a socially optimal way. But what if they are not angels? What if they are just like everybody else—sinners in a fallen world pursuing their own self-interest? This question is at the heart of the economic field of public choice, whichwe’ll explore in the next chapter.