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Chapter 18: Problem 11

An article describing the work of James Buchanan observed, "Buchanan and other public choice theorists altered the debate by proposing that government may not really correct problems in the marketplace because of the wealth trading, or rent seeking, that occurs during the legislative process." The same article included the following statement by Buchanan: "I was greatly influenced by Knut Wicksell's admonition that economists cease acting as if government were a benevolent despot." a. Explain why James Buchanan and other public choice economists believed that government policymakers do not act as "benevolent despots." b. Why would "rent seeking" be an impediment to government attempts to correct "problems in the marketplace"?

Short Answer

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Public choice theorists like James Buchanan believed that government policymakers do not act as 'benevolent despots' because decision-making is influenced by self-interest and political gains, instead of solely aiming for public welfare. 'Rent seeking' poses an impediment to governmental attempts to rectify market issues because it shifts the focus from efficient market correction to personal or political gains.

Step by step solution

01

- Understanding the concept of 'Benevolent Despot'

Before familiarizing with the views of James Buchanan and other public choice economists, understanding the concept of a 'Benevolent Despot' is crucial. In economic terms, a benevolent despot refers to a hypothetical government that acts in the best interest of its citizens, making decisions devoid of personal or political gains, instead aiming for general public welfare.
02

- Introducing the notion of Public Choice Theory

Public choice theory is the application of economic analysis to political science topics. It holds the view that politicians, like everyone else, make decisions based on self-interest. James Buchanan, being a proponent of this theory, argued that government policymakers don't act as benevolent despots because their decisions are often influenced by personal or political gains, thus deviating from the path of public interest.
03

- Understanding 'Rent Seeking'

'Rent seeking' is a concept in economics that involves individuals or entities seeking to maximize their own private gains at the expense of societal welfare. During the legislative or policymaking process, rent seeking occurs when entities engage in lobbying or other activities to secure benefits or concessions.
04

- Interpretation of the impediment imposed by 'Rent Seeking'

When rent seeking becomes widespread, it becomes an impediment to the government's attempts to correct marketplace problems. This is due to the reason that the focus diverts from efficient market correction to the accumulation of personal wealth, welfare, or political influence. Therefore, the original objective of the socio-economic welfare gets belittled or lost in the process.

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Most popular questions from this chapter

Suppose that a country has 20 million households. Ten million are poor households that each have labor market earnings of \(\$ 20,000\) per year, and 10 million are rich households that each have labor market earnings of \(\$ 80,000\) per year. If the government enacted a marginal \(\operatorname{tax}\) of 10 percent on all labor market earnings above \(\$ 20,000\) and transferred this money to households earning \(\$ 20,000\), would the incomes of the poor rise by \(\$ 6,000\) per year? Briefly explain.

Cecil Bohanon, an economist at Ball State University, and Brian Pizzola, an economist with the accounting firm Ernst \& Young, used a proposed tax on income earned by credit card lenders in Minnesota to explain how tax incidence is determined. The tax, which state lawmakers did not pass, would have been imposed on lenders who charged credit card customers more than 15 percent interest on their balances. Bohanon and Pizzola explained that many of those who paid high interest rates were consumers with fewer other sources of credit, and there was nothing to prevent lenders from further raising interest rates after the tax was imposed. John Spry, an economist at St. Thomas University, stated that the proposed tax was "highly regressive \(\ldots\) twenty percent of the new tax would be paid by Minnesota families with the lowest 10 percent of income. Thirty-seven percent of the tax would be paid by families with the lowest 20 percent of income." a. Explain why John Spry believed that the proposed tax would have been "highly regressive." b. Do Bohanon and Pizzola believe the elasticity of demand of those who would have been most affected by the tax was more or less elastic than the elasticity of supply of credit card lenders? Briefly explain.

Draw a Lorenz curve showing the distribution of income for the five people in the following table. $$ \begin{array}{l|c} \text { Name } & \text { Annual Earnings } \\ \hline \text { Lena } & \$ 70,000 \\ \hline \text { David } & 60,000 \\ \hline \text { Steve } & 50,000 \\ \hline \text { Jerome } & 40,000 \\ \hline \text { Lori } & 30,000 \\ \hline \end{array} $$

Jason Furman served as the chairman of the White House Council of Economic Advisers under President Obama. In an opinion column in the Wall Street Journal discussing President Trump's tax reform proposal, Furman noted the need "for seriously revamping America's inefficient business-tax system to unlock stronger economic growth." But he also observed that tax reform is even more difficult than reforming the health care system "since it touches a larger fraction of the economy and threatens more powerful vested interests." a. Briefly explain what Furman means by "powerful vested interests." b. If tax reform leads to stronger economic growth, shouldn't a majority of Congress support it even if vested interests oppose the reform? Why then has tax reform legislation been difficult for Congress to pass?

An article in the Economist on the work of the late Nobel Laureate James Buchanan made the following observation: "It was important...to understand the ways that government could fail systematically." a. What does government failure mean in this context? How does public choice theory help us understand how "government could fail systematically"? b. The same article noted that "rent-seeking is a very useful concept to have around when thinking about policy." What is rent seeking? Why is the concept useful when thinking about policy?
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