Economics Study Set 20

Business

Quiz 6 :
The Economics of Political Action

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Quiz 6 :
The Economics of Political Action

The public choice analysis employs the economic methods and tools to political problems in an economy. It is the study of political decision making that affects the formation of government. According to this theory the decision making in an economy will be directed by rational ignorance effect. The rational ignorance effect states that as the probability of the single vote are the decisive one, are zero in the economy, majority of voter will cast their vote without seeking much information about the person they are voting for. The rational ignorance states that voters will be less or not at all informed about the political issues and the candidates before casting their votes.

The public choice analysis employs the economic methods and tools to political problems in an economy. It is the study of political decision making that affects the formation of government. According to this theory the decision making in an economy will be directed by rational ignorance effect. Unlike the market sector, which have strong incentive to keep cost low and acquire customer satisfaction through better service, the does not have a profit motive or the strong incentive to create satisfied customers. On contrary, if the government agencies fail to spend the entire amount of allocated budget they will lose the potential budget allocation from the government in the next period. This incentive structure of the government agencies often gives rise to inefficient allocation of resources. As the incentive structure of the government agencies give rise to inefficiencies, the empirical evidence showed that the private sector often result in efficiencies in providing the services that is provided by the government less economically. Therefore, even in the case of the maintaining a forest the private ownership will be more economical. The profit motive of the private sector will drive them to protect and maintain the forest more economically than the government ownership does.

The situation in which market fails to generate efficient allocation of goods and services is called the market failure. In market failure the market fails the criteria for economic efficiency. The economic efficiency occurs when marginal benefit from an economic activity is equal to its marginal cost. The two criteria for economic efficiency are: 1. If an economic activity produces more benefit than its cost, then the activity is said to be economically efficient. 2. If an economic activity produces less benefit than its cost, then the activity is said to be economically inefficient. To produce an economic efficient outcome both of the above criteria has to be satisfied. The market failure cannot, at every situation, be solved by the government. Government is an organization lead by the political brains. The political decision making is largely directed by the political agendas. At time this does not involve the issue of economic efficiency. Hence, the political decision making can lead to economically inefficient allocation of resources. This situation is called the government failure. Therefore, government intervention not always leads to economic efficiency.

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