Clasificación (SUCS)

Democratic institutions are, in principle, intended to ensure that political decision makers are accountable to voters. As political representatives, political decision makers are agents of voters and have an obligation to act in the public interest.

We define the public interest in terms of social objectives:

The public interest is the pursuit of social objectives of efficiency or social justice.

Conversely:

It is not in the public interest when political decision makers choose policies that provide special privileges for groups that have narrow self-interested objectives contrary to the best interests of voters and society at large.

A producer interest group, for example, may wish to forestall environmental policies that would increase costs of production. Protectionist policies may be sought that benefit owners of capital in import-competing industries. Agricultural and other producers may seek subsidies from the government budget. Because of fear of the consequences of increased competition, school administrators and teachers in government schools may seek assurances that private schools will not receive government subsidies and that parental choice among government schools will not be allowed. Medical practitioners may seek limits on compen-sation payments for malpractice. Lawyers may seek unlimited rights to propose class-action cases and no limitations on damages that courts can assign. Trans-portation companies may seek increased public spending on highways. Logging companies may want rights to log public land. Various organizations may seek

tax-exempt status. Groups may seek public spending in the locations where they reside and where local contractors have advantages in bidding for public con-tracts. At the local-government level, rezoning of land from agricultural to more valuable commercial and residential use may be sought. Financial advisors and banks may seek avoidance of regulation in financial markets. The political deci-sions sought by special interests provide privilege but impose costs on taxpayers.

Some interest groups seek socially beneficial responses from political decision makers. For example, interest groups seek protection of the environment and of biodiversity. Some interest groups call for greater public attention to road safety.

The activities of public-interest groups seeking socially beneficial policies would not be necessary if political decision makers focused on the public interest.

Limits on voters’ information

Principal–agent problems exist because of asymmetric information. Agents (the political decision makers) would behave in the manner consistent with the best interests of the principals (voters and taxpayers) if the actions of the agents were observable and thereby known to the principals. If taxpayers and voters knew that political decision makers were acting contrary to the public interest, the insti-tutions of democracy would allow electoral disciplining and replacement of the political decision makers who deviate from the public interest. Political decision makers would not deviate from the public interest in the first place if they knew that their behavior was being observed and that they would be held account-able by voters. The scope or possibility of political behavior that deviates from the public interest therefore depends on the information about political decisions that voters have.

A government budget

Political decisions about public finance and public policy are shown in a govern-ment budget. Table 2.1 is a stylized portrayal of a governgovern-ment budget.

The expenditure side of the budget shows public spending on public goods (or public investment), spending on income transfers (or welfare payments), and spending by government on itself (or government consumption). Part of public spending is for interest payments and repayment of government borrowing. Tax revenue also may be transferred to other levels of governments.

The revenue side of the government budget shows the sources of finance for public spending. Taxes and sales of government bonds provide revenue. Another source of revenue is fees and user prices, such as for passports and drivers’

licenses and for tolls paid for use of roads and bridges. Transfers of income may be received from other levels of government. Lotteries and inflationary financing also provide revenue.¹

1 The income transfers among levels of governments take place in fiscal-federal systems where differ-ent levels of governmdiffer-ent levy taxes and spend governmdiffer-ent revenue. We shall study fiscal federalism.

We shall also study in detail the different means of financing available to governments.

TABLE 2.1. THE COMPONENTS OF A GOVERNMENT BUDGET

Expenditure Revenue

Public goods and other public investment Income transfers (welfare payments) Government spending on itself (wages

and salaries of the bureaucracy and other expenses of the branches of government)

Government budgets provide information in greater detail than shown in table 2.1. Availability of information to voters and taxpayers through the government budget is nonetheless limited by aggregation of data. Data on the composition of public spending are too aggregated for individual voters and taxpayers to be able to determine in detail how tax revenue is spent. The government budget also does not provide information on the reasons for political decisions about taxation and public spending. Nor is information provided about the structure of taxes or on tax exemptions and subsidies.

Information provided to taxpayers and voters through the government bud-get is incomplete.

Information as a public good

We do not expect taxpayers to attempt personally to acquire information about all political decisions that affect their well being. Acquiring information about political behavior and acting on the information is a public good because the benefits from acquiring and using the information to monitor political behavior extend to all taxpayers and voters.

Individual taxpayers and voters confront the incentive to free-ride on infor-mation acquisition and political monitoring.

Rational ignorance

Voters also may choose to remain rationally ignorant. There is a personal cost to acquiring information. The personal cost may exceed the personal benefit from having the information.

Rational ignorance describes the personal disincentive to invest in acquiring information when personal costs of acquiring information exceed personal benefits.

The sources of asymmetric information for voters or taxpayers

The asymmetric information that underlies the principal–agent problem is due, therefore, to:

r the inability of voters and taxpayers to know the details of political decisions because the information is not provided

r disincentives of voters and taxpayers to acquire information because infor-mation is a public good

r rational ignorance by voters and taxpayers.