James d. Gwartney

Video:
Externalities Potato Chip
Our analysis indicates that public goods and externalities may undermine the efficient
operation of markets. Economists use the term market failure
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to describe the situation
where the existing structure of incentives creates a conflict between personal self-interest and
getting the most out of the available resources. Market failure encourages self-interested
decision-makers to engage in counterproductive rather than productive activities.
Market failure creates the potential for government action to improve economic
efficiency. But the political process is merely an alternative form of economic organization. We
need to know more about how that form of organization works so that it can be compared
realistically with markets.
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We now turn to that topic.

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Understand Political Pressures
The first lesson of economics is scarcity: there is never enough of anything to
fully satisfy all those who want it. The first lesson of politics is to disregard the
first lesson of economics.
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— Thomas Sowell, Professor of Economics, Stanford University
Video:
Public Choice
The political process is an alternative form of economic organization. It is not a corrective
device that can be counted on to provide a sound remedy when problems arise. Even when it is
controlled by elected political officials (as opposed to, say, an autocratic regime), there is no
assurance that government actions will be productive. This is particularly true when
governments become heavily involved in allocating scarce resources toward favored sectors,
businesses, and interest groups. As mentioned in the introduction to Part 3, the public choice
analysis developed during the past half century provides considerable insight into the operation
of democratic political decision-making.
Clearly, policies favored by a majority do not always make a society better off. Here’s a
thought experiment: Consider a simple economy with five voters. Suppose three of the voters
favor a project that gives each a net benefit of €2, but imposes a net cost of €5 on each of the
other two voters. In aggregate, the project generates net costs of €10 against net benefits of
only €6. It is counterproductive and will make the five-person society worse off. Nonetheless,