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

Chapter Fourteen: Decision-making in Democracy: Public Choice 335 an understanding of how highly consumers value a product, nor do they have a solid understanding of the costs of the resources used to produce the good. Why not? Because they don’t have prices to communicate that essential information. For reasons expanded in the next section, when the benefits are concentrated with a narrow group of voters, while costs are widely dispersed (or vice versa), government tends to produce inefficiently—either too much or too little of the product. However, government can be generally efficient to the extent that the costs of a particular program are paid for by those receiving the benefits. For example, if user fees are charged to those entering national parks, only those citizens who value the parks at greater than the cost of admission will go. This doesn’t guarantee efficiency; the government could still be charging a higher price than the government’s marginal cost, but the park service management at least has the benefit of market feedback as to how highly the market values their service. Similarly, when gas taxes are applied to all proportional to their use, and all roads are equally maintained, voters will tend to get the quality of roads they are willing to pay for. So what is the efficient level of government? One conceptual way to think about this is illustrated in Figure 14.3 . If government allocates resources rationally, they will apply scarce government resources on the most highly valued projects first, so they will choose projects with the highest marginal social benefit (MSB) at the lowest marginal social cost (MSC), leading to the highest possible net social benefit. As more resources are expended by government, they will apply them to the program with the next highest net social benefit ultimately until they reach Q*, the optimal size of government. Beyond this point, the marginal social costs exceed the marginal social benefits, and therefore lead Figure 14.3, Optimal Size of Government. Government programs conceptually come with both marginal social costs and marginal social benefits. If chosen rationally, government resources will be allocated to the most beneficial programs first, which have the least cost, for the largest net social benefit possible. As the size of government grows, increasingly the programs will progressively provide less social benefit at increasing cost, eventually exceeding the optimal amount, and decreasing social benefit. C/B MSB MSC - Net Social Benefit + Net Social Benefit Q Gov’t Q * Marginal social benefit: the benefit to society of an incremental (or additional) unit of a good (in this case government). Note this benefit is a conceptual number; it is impossible to aggregate subjectively assessed benefits to arrive at an actual number. Marginal social cost: the cost to society of an incremental (or additional) unit of a good (in this case government). Note this cost is a conceptual number; it is impossible to aggregate subjectively assessed opportunity costs to arrive at an actual number. When the benefits are concentrated with a narrow group of voters, while costs are widely dispersed (or vice versa), government tends to produce inefficiently—either too much or too little of the product. However, government can be generally efficient to the extent that the costs of a particular program are paid for by those receiving the benefits.