What is Public Choice?

• Definition: The use of economic tools to study political behavior.
• Rational Choice Theory: People act in their own interest, weighing costs and benefits.
• Key Ideas
  • Methodological individualism
  • Incentives matter (for voters, politicians, bureaucrats)
  • Collective action problems
  • Utility Maximization (subjective)

Utility Maximization

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Examples of Public Choice Problems

• Why do people vote (or abstain)?
• The main goal of politicians and government officials
• Bureaucratic expansion
• Special interest groups and rent-seeking

Rent Seeking

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Discussion Prompt

• How realistic is it to assume everyone acts out of pure self-interest in politics?
• What examples of rational self-interest do you see in government or daily life?
• How does a government provided rent differ from a market earned profit?

Hayek: The Problem of Unintended Consequences

• Hayek’s Knowledge Problem: Central planners lack access to all relevant, dispersed knowledge.
• Unintended Consequences: Policies often create unexpected outcomes due to limited information.
• The Use of Knowledge in Society (1945)

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Real World Examples

• Price controls leading to shortages
• Environmental policies causing perverse incentives
• Tax incentives causing unpredicted behaviors

Videos

Environmental Issues

Discussion Prompt

• Can policymakers ever “know enough” to avoid unintended consequences?
• If personal utility is subjective, can even a supercomputer “know enough?”
• Share an example where a government policy created problems it meant to solve.
• What happens when a policy leads to unintended consequences?

Hayek: The Road to Serfdom

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The Road to Serfdom

• Stage 1: Centralized economic planning leads to unintended consequences
• Stage 2: Unintended consequences lead to calls for more control
• Stage 3: Increased control erodes individual freedoms
• Repeat Cycle: The cycle continues, leading to totalitarianism

Social Policy Road to Serfdom

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Review & Discussion

• Why do big plans sometimes fail?
• How can we better use dispersed knowledge?
• What safeguards help reduce unintended consequences?

What Are Trade-Offs?

• Definition: Choosing more of one thing means getting less of another.
• Examples:
  • Guns vs. butter (military vs. social spending)
  • Efficiency vs. equity

Trade-offs

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Why Are Trade-Offs Politically Difficult?

• Politicians prefer “win-win” narratives
• Avoiding hard choices can have costs
• Voters respond to clear benefits, not necessarily trade-offs

Another Kind of Trade-off

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Discussion Prompt

• Why do elected officials avoid acknowledging trade-offs?
• What’s an example of a trade-off in recent government decision-making?

Externalities: Side effects of Transactions

• Definition: Effects of a transaction on third parties not directly involved (can be positive or negative)
• Examples:
  • Pollution (negative externality)
  • Herd immunity (positive externality)

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Solutions to Externalities

• Regulation: Direct restrictions (e.g., pollution limits)
• Taxes or Subsidies: “Internalize” the externality—make it costly/profitable
• Voluntary Agreements: Negotiation among affected parties (Coase theorem) - requires property rights

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Discussion Prompt

• Choose a real-world externality. Which solution seems most effective? Why?
• Are “win-win” solutions possible? What obstacles exist?

Authorship and License

Do not submit to Quizlet, Chegg, Coursehero, or other similar commercial websites.

• Author: Tom Hanna

• Website: tomhanna.me

• License: This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Unless otherwise noted all images are the original work of the author or produced by the author using Perplexity or Gemini.