The Chicago School by Johan Van Overtveldt

Author:Johan Van Overtveldt [Overtveldt, Johan Van]
Language: eng
Format: epub
ISBN: 9781572846494
Publisher: Agate Publishing

DEADWEIGHT’S EFFICIENCY

After Stigler, Posner, and Peltzman, the fourth University of Chicago scholar to make a major contribution to the economic theory of regulation was Gary Becker. He focused on the way in which political influence leading to subsidies, regulation, and other interventions is actually generated. In Becker’s analysis, pressure groups play the crucial role in this process. Politicians and bureaucrats are “assumed to be hired to further the collective interests of pressure groups who fire or repudiate them by elections and impeachment when they deviate excessively from these interests … however … bureaucrats and politicians may have significant political power when pressure groups cannot repudiate them easily” (Becker 1983, 396). The analyses developed by Stigler, Posner, and Peltzman tended to conclude that the way in which regulation comes about inevitably creates considerable inefficiencies, but Becker concluded that the fight for political influence keeps these inefficiencies in check.

The starting point of Becker’s analysis is that the political process is characterized by competition:

The total amount raised from taxes, including hidden taxes like inflation, equals the total amount available for subsidies, including hidden subsidies like restrictions on entry into an industry. This government budget equation implies that a change in the influence of any group that affects its taxes and subsidies must affect the subsidies and taxes, and hence the influence, of other groups. Therefore, groups do not entirely win or lose the competition for political influence because even heavily taxed groups can raise their influence and cut their taxes by additional expenditures on political activities. (Becker 1983, 372)

This competition for political influence is strongly influenced by deadweight costs, which are “the distortions in the use of resources induced by different taxes and subsidies” (Becker 1983, 373) or “the winner’s gain less the loser’s loss from the regulation-induced change in output. These gains and losses are [in Becker’s analysis] what motivate the competing pressures on the political process. So rising marginal deadweight loss must progressively enfeeble the winners relative to the losers” (Peltzman 1998, 296).

Rising taxes and subsidies that drive output further and further away from its optimal level tend to increase deadweight costs. This leads to a competitive process that in the end promotes efficiency:

An increase in the deadweight cost of a subsidy discourages pressure by the subsidized group because a given revenue from taxes then yields a smaller subsidy. An increase in the deadweight cost of a tax, on the other hand, encourages pressure from the taxpayers because a given reduction in their taxes then has a smaller effect on the amount available as a subsidy. Consequently, deadweight costs give taxpayers an intrinsic advantage in the competition for influence. Groups that receive large subsidies presumably have managed to offset their intrinsic disadvantage by efficiency, an optimal size, or easy access to political influence … Policies that raise efficiency are likely to win out in the competition for influence because they produce gains rather than deadweight costs, so that groups benefited have the intrinsic advantage compared to groups harmed. (Becker 1983, 395–96)

Becker

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