Econ 132, Foldvary, Public Finance

Holcombe, chapt 9, Supply and demand in political markets


P. 175: Legislatures act as political markets for the supply and demand for subsidies.

Representatives provide the subsidies with the greatest political support.


P. 176: Special interests and government programs

Concentrated interests and spread-out costs.

The constituents are also an interest group.


P. 179: Logrolling and political exchange


Logrolling is a kind of political exchange where legislators who make policy can trade votes or other kinds of political support in order to get the political market to clear.

Logrolling creates a market for legislation, with votes as the medium of exchange.


The political marketplace should produce the output that is most highly valued by the traders; that is, by the legislators.


Because transactions costs are high between legislators and the general public, they are not directly a part of the bargaining process, so the outcome is not necessarily optimal from the standpoint of constituents.


p. 181: Agenda Control


The agenda is a list of issues and the sequence of deciding about them.

Those who control the agenda get the most advantages.

A committee chair gets a valuable advantage.

Special interests can concentrate on committee members and the chair.


Party committees decide on which candidates to back.


In clubs, a board or group of officers decide the agenda.


Rent seeking


Seeking privileges (economic rent) from government.

The seeking of transfers of wealth from government not related to or in excess of any

provision of service.

Better called “transfer seeking.”

Can be money, or a limitation of competition.


The disease of mass democracy.

The resources used to seek transfers are an economic waste.

They produce nothing of social value.

Gains from transfer seeking induce more people to do that,

creating more wasted resources.


p. 187: Public Sector Suppliers


Private-sector bureaucracies are limited by the need to be competitive.

Problem in deciding optimal government services: no measured profit.

Government bureaucracy: Niskanen's bureaucracy model.

Bureau chiefs pursue their own interests, seek to maximize their budgets.

Bureaucrats are budget maximizers in the same way that private managers are profit maximizers.

Larger government agencies have greater salaries for the chief, plus power and prestige.

Bureaucrats tend to seek employment in those agencies they are interested in.

They think they are furthering the public’s interest.


p. 190: The Public Sector Bargaining Process


The bureaucracy bargains with the legislature.

The Bureau’s output is determined at the same time as the budget cost.

The Burau can try to make an all-or-nothing proposal.

Advantage of the bureau: it deals with one or two legislatures,

while the legislature deals with many bureaus.

The legislature gets its information from the bureau.

Committee members tend to be high demanders.

Government bureaus tend to produce too much.


Government agencies are themselves an interest group.

Once in place, government programs are difficult to eliminate.


Fiscal Federalism


A system in which government programs are undertaken at different government levels.

Three advantages to producing public goods at the lowest level of government possible.

First, special interests will be less effective because the costs of their programs are less diluted. Second, people can choose among governments, and more consumer choice is likely to better satisfy consumers of government goods and services.

Third, with many governments, individuals can compare the performance of their government with other nearby governments to gauge the government's performance.