Concentrated Benefits and Diffuse Costs

Interest groups tend to lobby the government to redistribute money to them because people face concentrated benefits and diffuse costs.

People in an interest group receive all of the benefits of redistribution to that group: the benefits are concentrated. They only pay a portion of the cost – usually the costs are diffused among taxpayers in general. Because of this, interest groups often favor even subsidies that decrease social welfare, because they receive more in benefits than they pay in costs.

Members of an interest group often will do more to create or defend a subsidy than a taxpayer will do to destroy it. The members of the interest group should be willing to spend as much as they receive in benefits to defend the program. Individual taxpayers should only be willing to spend as much as their tiny share of taxes to challenge the program.

An example:

There is a town with five people in it: a doctor, a farmer, a lawyer, a poor man, and the mayor. The first four men lobby the mayor separately, and each manages to convince him that they are part of an important interest group (doctors, farmers, etc.). The mayor passes a law paying members of their group $1000. The mayor decides that he is an important interest too, so he gives himself a $1000 pay raise. The townspeople pay $5500 in taxes, because each subsidy costs $100 to organize. The men in the town split taxes equally, so they pay $1100 apiece – more than each gains from his own subsidy.

The townspeople would benefit from abolishing all of the subsidies together. But no one wants to abolish his own subsidy. The doctor, for example, receives $1000 from the town but only pays one fifth of its cost: $220. The subsidy is worth $780 to him. While he is willing to spend up to $220 to get rid of any other subsidy, he will spend up to $780 to defend his own subsidy. Only all four of the other townspeople organized together would be willing to spend more than the doctor to repeal his subsidy: $220 per person, or $880.

Money isn’t everything, but it is important. An interest group can use money to defend themselves by paying for positive advertisements, by buying support from politicians, or by lobbying in retaliation against other interest groups that have challenged their subsidies. Interest groups can also spend money lobbying to make their subsidies hard to see. For example, it is harder for consumers to see doctors’ subsidies that are disguised as licensing requirements and restrictions on nurse practitioner drug prescribing.

When the number of taxpayers is large enough, the taxes they pay for each subsidy is tiny. The costs of a program may be diffused so widely that it isn’t worth the cost to organize people against it. If 300 million people pay taxes for a billion dollar subsidy, each pays only a few dollars. It costs money, time, and energy to identify rents, to explain to voters why they should care enough to vote against them, and to convince politicians that they should be removed. Democracies can fall prey to rent-seeking – unwilling to resist a million little bites from a million little parasitic programs. In societies that do not resist rent-seeking, individual success depends on the ability to manipulate government to the detriment of others.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.