Diffuse Costs, Concentrated Benefits

In a principles of economics class, I have to spend a lot of time explaining why the government puts into place policies that create inefficiencies in markets, or policies that don’t seem to make much sense. In a situation where you’re already faced with disseminating large amounts of information, I tend to emphasize one factor above all, the principle of concentrated benefits and diffuse costs. When we examine very simplistic market-changing tools like a price floor or a quota, we can clearly identify the winners–generally a really small group of people that benefits greatly–and the losers–generally a large group of people that loses out, but usually just a small amount. So even if the losses of the larger group outweigh the benefits to the smaller group, it’s hard to get the losers to rally around a cause to change things because what they’re losing is not quite worth the time to push for a change. Those who are winning have a strong incentive to make sure the policy stays in place to ensure their continued winning.

The press around the Occupy Wall Street protests is beginning to take form with a small twist on this outcome. Instead of just losing out a little bit, those who are losing out are losing out a lot. And though those who are winning still have a vested interest in maintaining the power structure, but even that is coming unraveled a bit. Warren Buffet’s offering to pay more taxes and in today’s Washington Post, Ezra Klein says there are a lot of people bitter at the fact that “You did everything you were told to do, and it didn’t work out.”

Maybe we’ve gotten far enough along the inequality path that the diffuse costs are big enough for individuals that they’re asking for change. That they don’t know what kind of change yet is definitely something that needs to be worked out, but perhaps not all that surprising. We had to know this wouldn’t last forever.

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