Understanding Incentives of Politicians
The decision to vote against a tax that would solve the negative externality problem and
enable society to achieve the efficient solution.
o Benefits
*Campaign contributions from the potentially affected industry.
*Votes of consumers
Consumer surplus
More consumer surplus indicates more consumer votes; so this benefit is largely
captured by “votes of consumers”.
Producer surplus
More producer surplus indicates more campaign contributions; so this benefit is
largely captured by “campaign contributions …”.
o Costs
*Votes of those in favor of social welfare maximizing policies.
*Guilt associated with not voting for the socially efficient policy.
Lost government revenue.
Lost compensation for externality sufferers.
Less compensation for externality sufferers indicates less externality sufferer
votes; so this cost is largely captured by “lost votes of externality sufferers”
below.
Lost votes of externality sufferers.
Notes
o Politicians are rational.
o Politician idealism, which is factored into the cost benefit analysis above through “guilt”,
is weighed against other considerations when politicians make decisions.
o Cost benefit analysis & implied selection: Given the incentives that politicians face, there
may be a selection of less idealistic people into politics – the less idealistic may be able to
survive more easily due to an ability to collect more campaign contributions
o Cost benefit analysis and implied way to alter politician behavior: if the ability of special
interest groups to make large campaign contributions is reduced (through, for example,
campaign finance legislation), the idealism and other considerations will play a more
pivotal role in decisions of politicians.
o Cost benefit analysis and understanding when politicians vote in favor the socially
efficient outcome: The more aligned are the interests of voters and special interests
insofar as a socially efficient policy, the more likely politicians will vote for the policy.
Externalities versus common resources: Cost benefit analysis may help us understand
which socially efficient policy we are more likely to see. For example, with common
resources, there may be very few voters and special interests against an efficiency
maximizing policy such as taxes. Therefore, with common resources we may be
more likely to see the efficient solution than with externalities.
Externalities in one industry versus externalities in another: Cost benefit analysis may
also help us understand in which industries we are more likely to see the efficient
solution to the externality problem. For example, surface/strip mining versus
offshore drilling.