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Agricultural & Applied Economics Association

Political Preference Functions and Public Policy Reform Author(s): Gordon C. Rausser and William E. Foster Source: American Journal of Agricultural Economics, Vol. 72, No. 3 (Aug., 1990), pp. 641-652 Published by: Oxford University Press on behalf of the Agricultural & Applied Economics Association Stable URL: http://www.jstor.org/stable/1243034 . Accessed: 10/01/2011 04:11
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Political

Preference

Functions

and

Public

Policy

Reform

Gordon C. Rausser and William E. Foster


A model of policy making is developed where governments seek to maximize support from social groups through the combination of both PERT (social-welfare-increasing) and PERT (welfare-transferring) policies. The implicit weights of a political preference function shift with a change in the relative cost of interest group organizing. Attention is paid to the degree of wealth transfers as total social welfare increases because of PERT policy changes. The model demonstrates that, in the case of two competing groups, the weight given to one group in the allocation of social surplus will increase as total social welfare increases with a bias toward the other group. The relative weights placed on consumers and producers based on PEST policies alone are misleading indicators of the political influence of groups. A number of general implications of this political economic analysis for the reform of public policies are investigated. Key words: agricultural policy, policy reform, preference functions, welfare.

Most analyses of policy reform, (e.g., Gardner, Stoeckel and Breckling), focus only on political economic-seeking transfer policies (PESTs). These policies are meant to redistribute wealth from one social group to another and are not directly concerned with efficiency. Other types of policies are PERTs, or political economic resource transaction policies (Rausser). These policies reduce transactions costs in the private sector by, for example, correcting market failures or providing public goods; they are ostensibly neutral with respect to their distributional effects. The distinction between the types of policies is briefly summarized by the popular metaphor of an economy as a pie: PERTs expand the size of the pie, and PESTs allocate the portions served. The joint product approach to public policy involving both PESTs and PERTs avoids the extreme views found in the literature that focus either on government failures (rent seeking, directly unproductiveprofit-seekingactivities, etc.) associated with the names of Buchanan and Tul-

ifornia, Berkeley and chief economist at the Agency for International Development in Washington, D.C. William E. Foster is an assistant professor of economics at North Carolina State University. Giannini Foundation Paper No. 930 (reprint identification only). Lee, and the editor, Peter Barry, for a number of useful comments and suggestions.

Gordon Rausser RobertGordonSproulDistinguished C. is Profesand Economics the University Calat of sor, Agricultural Resource

The authors wish to thankOttoDoering,Harry Gorter,David de

lock, Bhagwati, etc., or on market failures corrected by benign governments. We take the perspective in this paper that these extreme views only set the bounds on actual government behavior. An analytical framework for jointly selecting PEST and PERT policies can be motivated by an example. Consider a public good that potentially can make both producers and consumers better off if there is some actual sharing of benefits. The market-exchangeeffects of this PERT in equilibrium, however, are such as to make producers worse off than without its dissemination. Specifically, total wealth increases (the economic pie expands) but, due to an inelastic demand, the distribution of benefits changes to the detriment of producers. Producers acting as a coalition may obstruct the implementation of the public good or PERT unless they are compensated in some form. One form of compensation is to introduce a PEST which transfers some wealth resulting from the new PERT equilibrium to producers. This transfer of wealth, the PEST, may actually be a means of securing the welfare-increasingpolicy even though it may appear as an inefficient rent-seeking based policy. As a result, the wealth transfer may be a crucial and Pareto-improving component of general policy. Under these circumstances, one majorimplicationis thatthe social costs of PESTs should not be judged in isolation. The benefit of what may nominally be a PEST may lie in

Copyright 1990 American Agricultural Economics Association

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the PERTs which it allows to exist. Correspondingly, the benefits of a PERT may be less than those observed directly. To assure the PERT's political viability, some social costs may be incurred in the implementation of inefficient transfer schemes. In the above setting, selected policies in a world of rational decision makers reflect an optimization game that can be modeled as a maximization of a reduced-form political preference function (PPF). Policies are in place, in part, because they serve the interest of those with relative political power and influence. The rational process generatesa portfolio or mixtureof PERT and PEST policies. There is a wide scope of possibilities to interchangethe use of PESTs and PERTs so as to acquire, balance, and secure political power. The PERT/PEST integrated framework emphasizes transactions costs and provides the foundation for meaningful prescription. The framework has three major dimensions: the level of PEST intervention, the level of PERT intervention, and the choice of the policy instrument mix. To illustrate the importance of the choice of the policy instrument mix, consider the U.S. proposal for agricultural reform tabled in Geneva on 25 October 1989. This proposal focuses on market access (tarrificationand phase reductions), export competition (eliminates all export subsidies and export prohibition), internal support (phase out most trade-distorting policies, discipline less trade-distortingpolicies, and allow all minimally trade-distortingpolicies), and sanitary and phytosanitary provisions (promote harmonization and establish an international process for food safety, animal health and plant health trade disputes). All of these policies and their proposed adjustments represent different alternative policy instrument mixes. For example, the internal support component of the U.S. proposal involves changing the policy instrument mix by phasing out coupled PEST policies (e.g., administered price policies, income-support policies linked to production or marketing, transportationsubsidies, etc.) and permittingor, in fact, substituting PERT policies (e.g., environmental and conservation programs, research extension, education, resource retirement programs, bona fide domestic food aid) and decoupled or neutral PEST policies (income support policies not linked to production or marketing). At any point in time, the selection of a particular representsthe choice configurationof instruments of the policy mix. This paper presents a new perspective on the

political economy of policy reform. A straightforward model of policy making is developed where governments seek to maximize support from different social groups through the judicious combination of both PERT and PEST policies (Rausser). Particularattentionis paid to the degree of wealth transfers (accomplished by the PEST) as total social welfare increases (accomplished by the PERT). The model demonstrates that, in the case of competing interest of two groups, the influence given to one group in the allocation of economic surpluses will increase as total social welfare increases with a bias toward the other group. PEST policies, while typically thought of as welfare transferringand efficiency decreasing, can be welfare increasing when combined with PERT policies which, by themselves, may be impossible to implement. The impossibility of implementation is due to their potentially detrimental effect on sufficiently powerful interest groups. The essential result is simply that the policies accomplishing the wealth transferscannot be isolated from policies providing public goods. Practically speaking, what may appearto be socially wasteful and incoherent agricultural programs may actually be rationally designed schemes of compensation for larger, longer-termpolicies which expand total societal welfare.

Public Choice
Implications of recognizing that governments choose a mixtureof PESTs and PERTs are drawn from a concrete model. This concrete model incorporates government behavior and the strategic behavior of various interest groups. To simplify the presentation, and without loss of generality, only two interest groups will be analyzed here-producers and consumers. The frameworkembraces the objectives and structural decision rules of the government as well as the two interest groups. Current policies represent equilibrium outcomes (perhaps short run) in political economic markets. In essence, observed policies can be treated as the result of the structural framework or, equivalently, as the outcome of maximizing the reduced-form political preferencefunction (Rausserand de Gorter).This function does not necessarily represent the public interest or a social welfare function (Rausser and Freebairn). Arguments appearing in this preference function represent the performance measures (e.g., welfare surpluses, profits, etc.) that reflect the well being of each interest group.

Rausser and Foster

Policy Reform 643

The parametersof this preferencefunction or the marginal effect of its arguments have been reas ferredto in the literature the preferenceweights (Rausser and Freebairn). If we fix the level of the PERT, these parameters (or equivalently, these weights) are "local." In the revealed preference and empirical analyses that have been conductedby economists, only such local weights have been estimated. The formulated model presumes that the well being of each interest group can be accurately measured by consumer and producer surpluses (Gardner). In the political preference function, the implicit weights placed on consumer and producer surpluses in government decisions are shown to result from the degree to which those surpluses affect political support. The weights on a sum of consumer and producer surpluses reflect the degree of relative wealth transfersfrom one group to another, equal weights implying no transfers (Rausser and de Gorter). We demonstrate that these weights shift with a change in the cost of interest group organizing due to, say, an institutional change. More precisely, the relative weight on each group in the PPF is determined by an index of relative costs of political organization. A decrease in a group's organizing costs relative to the other group's costs increases its responsiveness to changes in its collective welfare (i.e., the cost decrease leads to an increase in its marginal political power). Such a cost decrease would shift wealth transfers in its favor and, in this way, the weight changes on that group in PPF.' Policy reform, therefore, entails the alteration of the PPF through changes in the underlying costs to each group determining political support. Such changes in costs may ultimately be related to institutional reform or more simply to the subsidization of political activity. The framework also demonstrates that judging the relative weights placed on consumers and producers based on PEST policies alone may be misleading. These weights are local in the sense that they reflect constrained government tradeoffs of group welfare for a given set of PERT policies. The implicit weights based on wealth transfers alone may favor one group, but the implicit weights based on the mixtureof both PESTs and PERTs may indicate just the opposite.

Government Behavior Consider a government in which politicians institute policies and programs in order to maximize the popular support from two groups, consumers and producers. The government realizes that its actions affect the two groups' economic welfare and that their welfare is directly related to their political support. A group's welfare is measured by its economic surplus-C or F, representing consumer and producer surplus measures, respectively. Given government actions, the levels of these surpluses are determined by the group's individual members acting in a decentralized way, consuming and producing in response to both market incentives and government policies. The government's policies have differential effects on the two groups, some combinations of programs benefiting both and some benefiting one while harming the other. The government, therefore, must make a decision on the configuration of policy that optimally trades off consumer and producer support through manipulation of their welfare. The government's choice problem is simply reflected through the effects of its actions on a government support function, S = S[Sc, Sf], where Sc represents supportfrom consumers and Sf from producers. It is also hypothesized that informed organizations represent each group's interests. Their political activities on behalf of their collectives' welfare affect the responsiveness of the groups' supports to changes in the welfare measures. These organizations set the political environment, as it were, in which the government allocates society's total welfare between consumers and producers. As noted above, PERT and PEST policies are available to the government in maximizing its support function through manipulation of consumer and producerwelfare. The choice of both types of policies is constrained by the current state of technology, the state of managerial ability of politicians, and the state of theoretical and conceptual foundations on which to build policy. We assume that these realistic constraints on the set of feasible government actions lead to limits on the total available economic surplus possible and to a social cost of transfersbetween groups. PERT policies are not neutral with respect to the benefits accruing to each group. Indeed, as noted above, PERTs may be sometimes consumer harming and sometimes producer harming. We reflect the choice of a PERT by the level of an index, E, such that as this index in-

1In our model, here, it is the marginal rate of political support with respect to a change in a group's welfare that is important in choice, not the absolute level.

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creases the total surplus available increases. For any given PERT (i.e., for any given level of E), the general design of the PEST will be chosen to attain any particularlevel of surplus or, more generally, welfare transfer between groups with the least cost.2 The government recognizes that, through its design of the PEST (e.g., the level of a price floor in combination with a level of import restrictions), it is setting both consumer and producer surplus levels. There is in effect a surplus possibility frontier for every PERT policy that describes the highest possible level of the consumer group's economic welfare, C, for a given level of the producer group's welfare, F; i.e., C = C(FIE). This surplus possibility frontier is represented in figure 1. The surplus frontier incorporatesboth the market structureof consumer and producer behavior as well as the available technology of welfare transfer.3 Two conditions on this surfrontierare assumed to hold: plus transformation over the relevantrange, the welfare of one group decreases at an increasing rate with an increase

C
b a

c
E

SLO 0 FM Producer Surplus

LI F

Figure 1. Surplus possibility frontiers under alternative PERTs in the welfare of the other (i.e., 3C/3F < 0 and a2C/aF2 < 0). The surplus transformation frontiers for two levels of E are labeled Eo and EI, representing the movement from a lower level of total available surplus to a higher level due to the institution of a PERT and are graphically illustrated in figure 1. Without a PEST (without any transfers) the resulting equilibrium levels of consumer and producer surpluses occur at the point (CM,FM)where the surplus transformationcurve has a negative slope of unity; that dollar from one group to another would be represented by and the lines LO LI passing through the free-market equilibrium combinations on Eo and El. As the transformationfrontiers are drawn, the implementation of the PERT causes the free-market combination of surpluses to move to point a in figure 1 where the free-market level of producer surplus has decreased. For example, such a producer-harming PERT would be the government's dissemination of a new supply-expanding technology that decentralized producers would adopt individually but which, in the presence of an inelastic demand, causes harm to the collective group. Although the government's PERT and PEST decision is joint, the problem may be viewed in two stages. This is done for convenience purposes only; there is joint interaction and feedback between the stages regardless of how they might be structured. Because separability does not exist in the selection of the best mix of PERTs and PESTs, it makes little difference how the two stages are ordered. Here, the problem will be structuredas one of determining the optimal

2 We wish to emphasize that, in its most general form, our conceptual model can admit the possibility of government strategizing over the selection of the particular PEST instruments. We will set aside for the current discussion, however, the possibility that the government might purposefully introduce a degree of waste into surplus transfers for strategic ends. Such additional waste may result from the usefulness of a more wasteful transfer mechanism to (a) differentiate between decentralized decision makers and, thus, more cheaply counter political opposition by dividing and conquering and (b) encourage further rent-seeking activities of interest groups and, thus, perhaps to increase the government's political support. The first possibility is discussed and analyzed in Foster and Rausser. Models of political competition between groups typically represent the government as a conduit of group pressure and the transfer scheme (the PEST) as a mechanism for rewarding or penalizing a group's relative political power. Heuristically, in such models the transfer mechanism implemented by the government would tend to be the most efficient. In the sense of minimizing deadweight losses, all groups can share in an efficiency gain. For example, Becker notes that competition among pressure groups favors efficient methods of taxation and sometimes (not necessarily always) efficient methods of subsidization (p. 386). Gardner uses this notion of efficient redistribution to explain why different forms of subsidization prevail over others under different market conditions. The methods of tax and subsidy in most models of political pressure serve the single purpose of allocating surpluses and, thus, these models suggest that the choice of PEST would not needlessly dissipate rents that could otherwise be enjoyed by at least one group. Closer to reality, however, the form of the PEST may also serve the other purposes of exploiting imperfect information or encouraging furtherrent seeking. The government may, in fact, weigh the relative inefficiency of a transfer scheme against, for example, its ability to hide its own inefficiency. 3 Here, we are abstracting from the implementation costs of the transfer scheme and which group bears these costs. It is reasonable to assume that all groups share in these costs in the proportion that their memberships have in the total population. Thus, we assume that the group's shares of the implementation costs are not subject to strategic behavior and that they may be incorporated into the surplus transformation curve.

Rausser and Foster

Policy Reform 645

PESTs for each alternativelevel of a PERT. Once this has been determined, we then proceed to the best PERT policy conditioned upon the optimal (conditional) selection of the PEST. These two stages are offered as a simple way of interpretingthe joint interactivealgorithmthat must be employed to determine the optimal instrument mix of PESTs and PERTs. First, for a PERT (a level of E), the government chooses a constrained support-optimizing level of consumer and producer surpluses such that those levels lie on the surplus transformation curve. Its allocation of surpluses is dependent on the degree of rewards (increases in support) and penalties (decreases in support)offered by each group, and each group offers both greater rewards and penalties as it becomes more sensitive (or responsive) to changes in its collective welfare. At this stage, therefore, political organizations contend to enhance their clients' welfare by expending effort to make their respective groups more responsive and opposing groups less responsive to governmentaction. This first stage corresponds to more narrowly focused models of near-term rent seeking where interest groups struggle over known resources in a known political economic environment. The second stage corresponds to longer-term public decisions, to questions of infrastructure development and generally to policies not subject to the same organization strategizing as in the first stage. In this second stage, the government must make a discrete choice of a PERT policy, of altering the surplus possibility frontier. This choice of a PERT is not done in isolation: the choice of the best available PERT must also recognize the rent-seeking activities that occur whichever PERT is chosen. The government's decision to institute a PERT, therefore, is conditioned on the PEST (that is, an optimal rent-seeking surplus trade-off exists for every E) as well as the PEST conditioned on the PERT.4 The feasible means of surplus transferdictates curve. the concavity of the surplustransformation The discovery of a more efficient method of transferwould lead to a shifting out of the transformationcurve at every point except at the freemarket, zero-transfercombination of group sur-

pluses.5 Taking as given the sensitivity of group support to welfare changes, the government wishes to choose the optimal combination of consumer and producersurplusesthat falls along the available transformationcurve. It will do so in the familiar marginalist way: The last dollar transferred will just balance the additional decrease in losers' support,with the additionalgain in beneficiaries' support generated by that dollar, less the waste of the transfer. (1)

asc ac asf=

0. C+ C aF aF -

Such a governmentchoice would generally place the resulting combination of consumer and producer surpluses on one side or the other of the free-market point on the curve. Political Preference Function The relative weights on the two groups in the PPF will be a reflection of the government's allocation of surpluses which will, in turn, be the result of the political support offered by those groups. The PPF is a weighted average (here, arithmetic) of the group's surplus measures, + (1 w).F, w.C implying that in equilibrium the weights on the two groups that would be consistent with the maximization of the PPF are such that PPF = (2)
-

ac
aF

(1 - w)
w

The surplus transformationfrontier is a function of the particularPERT and the political support given by the two groups which is, in turn, a function of the costs of organizing activities, ec and ef, which we discuss below. Therefore, we may generallywrite w = w(E, ec, ef). This weight is a local representation, dependent on the level of E. Once the PEST policy has been decided, given each PERT choice, the governmentthen chooses
Such a change in the transformation frontier would itself be a PERT and more generally should be subject to acceptance or rejection in the government's optimal selection of policies. Allowing that a more generalized view of the strategic government behavior is possible (following the remarks in footnote 3), we shall nevertheless confine ourselves to a choice among PERTs that leads to frontierat every point, that is, PERTs expansion of the transformation tht we refer to as pie expanding. We assume that any more efficient means of deviating from the free-market equilibrium of group surpluses is immediately adopted (as in Becker and Gardner).

4 As in the case of implementing the PEST, we assume that the cost of implementing the PERT is borne by each group in some fixed proportion and not subject to strategic behavior. Thus, we assume that these costs may be incorporated into the degree of the outward shift of the surplus transformation frontier.

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the optimal PERT in seeking to maximize support. There is no straightforwardrule of thumb for comparing among PERTs their constrained political equilibrium surplus combinations. The government's optimal PERT/PEST mix might lead to an increase in income transfers. For example, suppose that the best PEST policy has been decided for the case of E0 in figure 1 and the constrainedoptimal level of transfersto either group is minimal-that is, the political economic equilibrium is (CM, FM). If the government chooses the level El, the resulting combination of group surpluses may be at point c where one group may be harmed, although that group may now receive significant transfers through the PEST. Indeed, more generally, it is possible that the deadweight loss per dollar transferred increases when moving from E0 to El. Therefore,the narrowfocus on only the PEST transfers in order to judge the relative power of interest groups may be misleading. Strategic Behavior of Consumer and Producer Organizations We assume that the support given to the government by each group is a function of its welfare as measured by its economic surplus and the effort expended by political organizations serving their clients' collective interests. These political organizations are considered endowed with the ability and information necessary to evaluate their clients' best interests in terms of seeking to maximize economic surplus.6 Thus, these organizationsattemptto make their clients' support functions as sensitive as economically justifiable to changes in surplus and to make the opposing group's support function as insensitive. Because of the limited information to decentralized decision makers, changes in welfare may not be connected in their minds with political decisions that otherwise might be influenced by threats or encouragement. Indeed, the problem facing the decentralized decision maker may be the inability to distinguish welfare changes caused by his government and changes caused by persons or events unconcerned with his or her political constituency. It is the purpose of the political organizations serving the
6 A political organization may not strictly be the agent of a group's collective interest but ratherhave coincidental interests. The knowledgeable, but politically weak, organization may attempt to make its decentralized, but politically powerful, partner more responsive to government actions through the collection, analysis, and dissemination of information. Thus, in this way a political symbiosis is obtained which can be modeled as an organization and its client group.

decision maker to provide such information and to provide confusion or misinformation to the decision makers not so served. In particular, consider the case of a producer organizationexpending effort, ef, to increase the additional political support producers offer for an increase in the group's welfare. That is, the effort is meant to make producer support more responsive to an increase in F and, thus, to encourage the government to increase F at the expense of C for a given PERT. Similarly, the effort also mitigates any decrease in consumer support due to the change in surplus allocation. In marginalist terms, the producers' organization attempts to increase the marginal rate of producer support with respect to F, aSfI/F, and reduce the marginal rate of consumer support with respect to C, aSc/aC. The consumers' organization expends a similar effort to increase the marginal rate of consumer support and reduce the rate of producer support. We take each group's marginal support as a function of the group's collective welfare and a measure of the relative effectiveness of the efforts expended by the political organizations. Let nc = and nf = nf(ef) measure nc(ec) the effectiveness or influence actually obtained by the organizations' efforts; in effect, effort is an input into the production of influence. Measure the relative influence of the groups by p = nc/nf. The marginal rates of support may be written as (3)

aC

= = Mc(C, p), and aF Mf(F, p),

ential rates of organizational influence for the same level of effort may occur for several reasons. Political organizations may have varying degrees of expertise, professionalism, credibility, access to mass communications, and internal cohesion. Indeed, an "organization" as we have defined it may not be monolithic but a collection of smaller organizations drawn together by belief in a common cause but uncoordinated in their tactics.7

where Mc/lap> 0 and aMflap < 0. Differ-

7 Although the use of a ratio of organizational efforts can be generalized by separately including e, and ef in the above functions, this complication yields little intuitive value for our present purposes. Nevertheless, it is importantto note that advertising and promotion messages from the consumer's organization would be just as effective as if the same information was advanced by the producer organization. In this sense the organizations can hide their identities or true purpose. Also implicit is that organizations' activities are not aimed at specific groups. That is, the effort of an organization is not tailored to influencing only the marginal support of a single group.

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Policy Reform 647

The unit cost of effort to the consumers' organization is represented by kc and to the producers' organization by kf. Differential costs of political activity may arise from several sources, the most important of which is the transactions costs of developing and maintaining politically cohesive groups. For smaller, more homogenous groups, such as farmers in the developed world, the costs of organizing, identifying, informing, and coordinating group membership is relatively low. For larger, diverse groups, such as consumers in the developed world, costs of similar organizational activities are relatively large.

(5)

aC aF aF ae

aC -1 p
-

VF A e

aM ac , ? ap- a \
I-p

aM

-ap

kI=

k,

where ?f and ?i are the elasticities of effective influence with respect to effort [i.e., Si = (eil/ of effort of each organization must be consistent with the effort of its opponent and the government's actions consistent with that political activity. From the above expressions and the discussion of the implied PPF, expression (2), we draw our first result regarding the local PPF weights, (6) 1- w w C
_

ni)(ani/aei)].In equilibrium,the optimallevel

eck, f
efkf c

The Level of Wealth Transfer and the PPF Weight Determination In order for these political organizations to have a role in this model, they must anticipate the effects of their activities on the welfare of their client groups. That is, the organizations understand how their efforts alter government incentives to allocate welfare across groups. In this sense, each organization behaves as a Stackelberg leader with respect to the government's choice of optimal wealth transfer. Intuitively, the organizations are setting the political terrain over which the government seeks to gather the greatest support. With respect to wealth transfers, the two organizations are gaming over the structureof support trade-offs-the iso-support curves of the government-choice problemleaving the government to find the optimal "consumption" of consumer and producer surpluses along the surplus possibilities frontier, C = C(F). Each organizationwishes to maximize its client group's economic surplus net of the cost of the effort expended. With knowledge of how changes in marginal rates of support affect government support and taking the activity of the opposing organization as given, each organization will expend effort until the marginalgain in its group's surplus is just equal to the unit cost of effort. From the government's decision rule given by expression (1), the definitionof the marginalrates of support given by expression (3), and the surplus transformationfrontier C = C(F), we can find each organization'sreactionfunction in terms of the PERT, E, and the political effort of the other organization,

VF

That is, the relative weight placed on producers in equilibrium is proportional to the ratio of marginal costs of political activity. For given relative effective efforts in equilibrium (i.e., a fixed equilibrium, p), a greater marginal cost of effort by the consumers' organization, ceteris paribus, leads to a reduction in the PPF weight on consumer welfare. The levels of effort expended by the two groups, however, will change with changes in the relative marginal costs of organizational activity. We may determine the equilibrium effects of an increase in relative costs by noting that expressions (1) and (6) must hold in equilibrium for every PERT and every ratio of costs, determining both the equilibrium levels of producer surplus [taking C = C(FIE)] and the ratio of political organizing efforts. Define the parameters qr = ec/ef and 0 = kc/kf and let ?c f. From expression (1), (7a) \dej (7b)

dF

dF

1 p (aMf aMe ac\ + e1 I<0, A ec \ ap ap aF


-

dF\ I=pi ( def \A/ e +(faMac aF p ap

> 0, '

where A = a2S/aF2 < 0. From expression (6), (7a), and (7b), we may sign (8a)
dec

1
c

aF
(4)

1p

1Me MC-c 8pF

Mf
p/

dOe

def 1 dO e

aabef d ef OeI A e

= dF Cf-dec e-

(1 - w) w

<0,

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(8b) dF dec 1 def 1i --e >>0, dO dO ef, dec \ dO ec where Cff = a2C/aF2 < 0. Finally, note that dF (9) d(1 - w)/w < 0. dF

Hence, we may state the following intuitively appealing result:


Defining the (local) weights on group welfare in the PPF as those consistent with government wealth transfer policy for a given PERT, an increase in an organization's marginal cost of political activity, relative to the opposing organization's cost, will decrease the weight on its client group's welfare.

sumers from given levels of surplus allocation and political activity. Suppose that, in this second stage of public policy making, the governmentaccepts the PERT; that is, let S[Sc(Cl, Pi), Sf(Fl, pi)] > S[Sc(Co, Po), Sf(Fo, Po)]. We are interested in the resulting degree of wealth transfersthat take place under these new political economic conditions. In terms of the PPF, how do the constrainedweights on group surplus change with the move to Ej? The answer is that the local weight on producer surplus increases although producersurplus may decrease with the move from Eo to El. We now prove this result. Note that the PPF weights are indicated by the value of rl-the relative organizational efforts-in equilibrium as indicated in expression (6). Define r7o= eco/ef as 70 7 The weight on producers increases r1. if mr> no or if pi > po;that is, if the equilibrium allocation of surpluses is such that the slope of the surplus transformationcurve is greaterunder the new PERT, -&C(FIE1)/3F > -&C(FIEo)/ aF. For example, in figure 1 an initial equilib= rium of (CM, FM)would imply 710 1. The weight on producers would increase (r1 > 1) with a new equilibrium at point c. To show this, supor pi, P,g , pose the opposite case, that rm! -0 which implies that, since the move from Eo to El is consumer biased, producer surplus must fall and consumer surplus must rise, F, < F0, C, > Co. In other words, if Pi - Po, then the new equilibrium under El would be represented by a point such as b in figure 1. Concavity of the marginal support functions assure that, if pi < Po, (10)

In particular, a decrease in the relative cost of political activity of the consumers' organization will increase the effort that organization expends and will decrease the effort that the producers' organization expends. This, in turn, will lead to an increase in the consumer group's welfare (and a decrease in F). As C increases and F decreases, the degree of wealth transfermoves in favor of consumers and, thus, the weight on the consumers in the PPF increases.

Pi = nc(ecl)/nf(efl). It is assumed that Po 3 Pi

and 71, = ecllefl;

and where Po = nc(eco)/nf(efo)

The Introduction of a Pie-Expanding PERT Consider the government's decision to introduce a PERT policy which expands the surplus transformation frontier at every point. That is, the government may move from the selection of Eo to El, implying that, for every F, C(FIE1) > C(F EO). Furthermore, consider the case of a consumer-biased change in PERT policies. We define such a biased shift such that the difference, C(FIE1) - C(FIEo), grows as F decreases. In terms of incremental expansions of the surplus transformation curve, a consumer-biased shift implies a2C/aFaE < 0. Intuitively, a consumer-biased shift would result in a free-market equilibrium where consumers are better off but producers are worse off. Furthermore, in terms of wealth transfer policies, a given increase in producer welfare through a PEST will come at a greater decrease in consumerwelfare underE1 than underEo; thus, the marginal loss in consumer support for the marginal transfer from any level of C would be greater. In effect, the producers' organization would find it more difficult to induce the government to transfer additional income from con-

Pi) Mf(Fi, > Mf(Fo, Po);

Mc(C1, pi) < Mc(Co, Po)and

thus, Mfel/Mc > Mto/Mco. From the government's optimal allocationof surplusesundereach PERT, however, riO(6/ c) = Mfi/Mci, and we have a contradiction. Hence, we may state the following result:
Governmentchoice of a consumer-biasedPERT leads to an increase in the (local) weight on producers in

the PPF.

Intuitively, the conditions expressed by (10) imply that consumersensitivityto surpluschanges falls the greaterthatgroup's welfare and the lower the relative level of pro-consumer political activity. Similarly, producer sensitivity rises the lower that group's welfare and the higher the relative level of pro-producer activity. In equi-

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librium, one would not observe both a decline in producer welfare, an increase in pro-producer effort, and at the same time a decrease in that group's sensitivity to changes in its welfare. The result simply says that, in general, governments will place less weight on any interest group that grows more satisfied and expends less lobbying effort. This is not to say that both consumer and producer welfare grow but that the degree of wealth transfer(from the noninterventionist point) grows in the producers' favor. In fact, the equilibrium surplus to producers may fall with an introduction in the PERT at the same time the constrained weights on producers may increase in the PPF.8 Local and Global PPF Weights The weights on consumers and producers in the conventionalPPF are local in the sense that they reflect only trade-offs between group welfare measures in the choice of the level of wealth transfer for a given PERT. In a similar manner one may think of the government choosing a PERT conditional on a particulartransfer mechanism and level of wealth transfer, that is, given a PEST. In this latter case, also, one would observe weights on each group that reflected only trade-offs in the choice of the PERT. The choice of the PERT is the selection of the surplus possibility frontier C(FIE) along which the government ultimately selects the optimal combination of surpluses. If one does not take into account that the PEST instruments and/or levels may change from one PERT to another,then one may draw erroneous conclusions regarding the relative group weightings. Figure 2 illustrates the hazards of assessing
8 A sufficient condition for an incremental increase in E to lead to a decline in producer surplus is found from the expressions defining the political economic equilibrium (1) and (6). After some comparative statics manipulations,

E \
o

B
e

\ \b 0 A
Producer Surplus

Figure 2. Alternative surplus possibility frontiers for choice of PERT


trade-offsbetween welfare levels by focusing only on a PERT policy decision. Suppose the government has the choice of moving from a base surplus possibility frontier given by curve BA to either of two frontiers given by curves AA and BB. These two PERTs correspond to a consumer-biased pie-expanding policy and to one that is producerbiased. The governmentchooses curve AA and the surplus combination given by point a. The point a is selected by the particular level of wealth transfer accomplished by the PEST. In this case, for convenience, the level of transfer is zero and a free-market outcome is the result which, in this illustration, is represented by the straight line tangent to curve AA at point a. Now, if one were to compare total welfare possibilities under the PERT yielding curve AA with that yielding curve BB, given the existing transfer scheme and level, one would conclude that the weight on consumer relative to producer surplus must be high. The total surplus given the existing PEST for curve BB is greater than that for curve AA, implying that the government must be willing to forego more than a unit of producersurplus for a unit of consumer surplus. In reality, however, the level of wealth transferredby the PEST under the PERT yielding curve AA would not be the same level as under the PERT yielding curve BB. Indeed, the optimal surpluscombinationconditionalon being on curve BB will be to the left of point b, implying less weight on consumers relative to producers. The optimal combination under the pro-

dF/dE = -(ACfe - OB)/(CffA - OA), where A < 0 is the derivative of expression (1) with respect to p, B is the derivative of (1) with respect to E, and A < 0 is the secondorder condition of the government's optimization problem. Now, the denominator of the above expression is positive, so a sufficient condition for the entire expression to be of negative sign as if B < 0; that is, if B = aMc/aC.aC/aE.aC/aF + Cfe.Mc.

Intuitively, producer welfare will decrease in equilibrium if the percentage decline in consumer sensitivity to a welfare change is less than the increase in the slope of the surplus possibility frontier (i.e., the slope becomes more negative).

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ducer-biased PERT may be, in fact, at a point such as point c, implying that the surplus combination is consistent with more equal weighting between groups if not a relatively greater weight for producers. Local weights reflected by a PERT selection would change as constraints on PESTs change, just as in the previous section where the local of weights changed with the introduction a PERT. Pie-expandingPERTs are usually associated with infrastructure development, technological R&D, and other policies usually thought to promote economic progress. The choice set of PESTs, on the other hand, is usually considered a given. Nevertheless, constraints on the choice of transfer schemes do exist and change over time. External events, such as changes in the cost of financing, may alterthe potentialchoices of PESTs and, thus, also alter the final equilibrium choice of both PEST and PERT. Other countries and international agencies may impose restrictions on the wealth transfer policies of some governments for their own purposes. Finally, technological developments, and other advances usually disassociated from rent-seeking and wealth transfers, will alter the shape of the surplus possibilities frontier itself. For example, better mechanisms for tax collection may imply less distortion relative to taxation via the manipulation of commodity prices. Take, for example, the case of an outside agency, such as the World Bank, imposing certain constraints on a government's choice of wealth transfer policies. The agency considers its own objectives consistent with an expansion of total social welfare, as measuredby the equalweighted sum of consumer and producer surpluses, in the country in question. Using only observedlocal weights on the choice of the PEST, for a given PERT, the agency may conclude that all that is needed to expand welfare is to balance the weights on groups represented in the PPF. It seeks to effect this equal-weighting outcome by constraining the government to using the market to allocate social welfare. By constraining the PEST, however, the only instrumentleft to the government to maximize its support is its choice of PERT. The result may very well be a decrease in total social welfare as the government alters the surplus possibility frontier. This possibility is illustrated in figure 2. Suppose the point e represents an initial political economic equilibrium on the surplus possibilities frontier given by curve BA. Point e happens to be a noninterventionistoutcome. A future political economic equilibrium, conditional on two

potential PERTs discussed above, is given by the surplus combination at point d. The freemarketequilibriaunder the two PERTs are given by points a and b. The combination of group surpluses given by point d lies to the northeast of point e and is consistent with the outcome of a cooperativegame with the conflict point e being the outcome if eitherconsumersor producersveto a move from the original situation. Suppose some outside agency, anticipatingthe apparent relative strength of consumers and hoping to maximize future total social welfare, enters the game between consumer and producer organizations and the government and constrains the government to enforcing free-market allocations. Suppose the outcome representedby point b is unacceptable to consumers and the governmentfinds, of the two free-marketpoints, that the outcome given by point a maximizes its support. Although the surplus combinationgiven by point a is a free-market one, it yields nevertheless a smaller total sum of equally weighted consumer and producer welfare measures than that associated with point d. In fact, as illustrated, there is a loss in the welfare of producers relative to the initial equilibrium point on curve BA and, thus, point a is inconsistent with a cooperative game. If producers and consumershave a veto over any move from the initial equilibrium that causes a decrease in their welfare and the only choices are constrained to be at points a and b, then the outcome will be no PERT at all. The outcome of an outside agency's constraint on the operation of a PEST would be a surpluscombinationgiven by point e, implying not only a decrease in the total sum of surpluses but a decrease in the welfare of both groups. Implications and Concluding Remarks The primary implication of the model is that the introductionof an expansion of total social welfare biased toward one group (e.g., a consumerbiased PERT) leads to a change in the degree of wealth transferin favor of the other group. That is, a biased PERT such as a technical advance with inelastic demand yields an increase in the local PPF weight on the group not favored by the PERT. Moreover, although the local weight on a group may increase with the introduction of a pie-expanding PERT, the group's actual welfare may decline. The degree of wealth transferrelative to a noninterventioniststate will increase, but absolute welfare of the PEST ben-

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eficiary will decline if the new noninterventionist allocation of surpluses does sufficient harm to that group. The PPF is a reduced-form expression of the more complicated (and richer) structureof a political system. Therefore, when speaking about reform (and almost always one is referring to ending wealth-seeking transfers), one is implicitly, if not explicitly, speaking about changing the weights on groups in the PPF. Grudging reforms, forced on a political system by an outside government or internationalbody, will fail if these underlying weights remain unchanged. Such reforms will be temporaryreactions to external demands and, once those demands abate, the political system will likely returnto its previous policy equilibrium. Only if outside pressures force the restructuringof the weights of institutions would such reforms be permanent. Indeed, unless the weights in the PPF change, unsustainable alterations in agriculturalpolicies should not be termed reforms at all. To move from a currentmixture of policies to sustainable reforms entails the movement from one policy equilibrium to another. The emphasis of this perspective is on a government's problem of selecting the mixture of public goods and transfers that maximizes its political support. Simply put, reforming food and farm policies implies changing the forces conditioning government behavior. The movement from one equilibrium to another, with a new discrete selection of a PERT and PEST mixture, is equivalent to eliminating a missing market. As with the Coase theorem, if all parties negotiate efficiently, then the existence of incomplete political economic markets is not an obstacle to efficient policy reforms. However, because of transactions costs and incomplete information, the Coase theorem does not provide an attractive solution. In this instance we are left with no alternative but to turn to collective action or government behavior to effectively lower the transactions costs and provide more adequate information so that a market for reform naturally emerges. For this argument to make sense, we must appeal to the economies of size, the willingness of governments to impose effective penalties and rewards, and new negotiation techniques. The demand for reform is an increasing function of the degree of social waste generated by wealth transfer programs but the supply of reform is not. Much like the demand for goods imagined, but yet beyond the present state of technology to produce profitably, the demand

for reform will remain unfulfilled without a change in a country's political technology. The reformof agricultural policies must come through changes in the means of compensating groups who would otherwise be losers or through institutional changes in the relative costs of political activity by groups paying the compensation (typically consumers). If we do not see a supply of reform, then we must not despair for the economic rationality of governments. We must, instead, invent the intellectual and political machinery that will allow reform to be profitably supplied. From the perspective developed here, reforms that lessen the distortionary and inefficient aspects of agricultural policy may be induced from two importantsources-the development of less wasteful means of compensation and the lowering of costs associated with making those paying the compensation more sensitive to government decisions. Developing better compensation schemes may be thought of as finding improved means to negotiate the allocation of society's welfare. Valuable transactions can take place between consumers and producers, involving the savings of many wasted resources, and yet these transactions remainunnegotiated.This is, in part, because there are no satisfactory means of satisfying both groups because of the inadequate stock of ideas. Rather than altering the political power relationshipsbetween groups, reform may be accomplished by demonstrating the feasibility of alternative, more efficient programs of wealth transfer. In the framework of the analytical model, the introductionof a less wasteful transfer scheme would be an expansion of the surplus possibility frontier at every combination of consumer and producersurplus levels (except at the free market point). Such an alteration in the surplus transformation curve would imply that the PEST more closely approximatesa lumpsum transfer. In a world of perfect knowledge, where every imaginable type of policy is possible, nondistorting lump-sum transfers would be the government's optimal means of allocating society's welfare. In the real world, however, a lump-sum transfer most often is not a practical means but rather a standardby which we can measure how advanced is the state of the art in wealth transfers. A second means of obtaining sustained reforms is a change in the relative costs of organizing those who would benefit by those reforms. By increasing the responsiveness of a group-in particular, consumers and taxpayers in the developed world-to changes in its wel-

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fare, the government would take advantage of the developed world goes on in apparent good present transfer mechanisms and would move order despite the years of social waste. Second, the allocation of surpluses to less wasteful com- improved knowledge is subject to the same polbinations. Reducing the costs of organizing the iticization and manipulation as other informabeneficiaries of reform may be done in several tion and misinformation supplied to interest ways-from direct subsidization to the reform groups. of the institutionsin which political activity takes March 1989; final revision received place. The direct subsidization of efforts to in- [Received December 1989.] crease the sensitivity of consumer/taxpayer in the developed world may, at first groups glance, seem to hold little promise. Nevertheless, some countries do have institutional ar- References rangements to keep watch over consumer interests, and the experience of Australia, for Among Pressure example, could serve as a model for other na- Becker, G. "A Theory of Competition for Quart.J. Econ. 48(1983):371Groups Influence." tions. One should note, however, that the ex400. pense of decreasing the cost of pro-consumer Bhagwati,Jagdish."Directly Unproductive, Profit-seeking activity and increasing the cost of pro-producer Activities."J. Polit. Econ. 70(1982):998-1002. must be borne, at least in part if not in Buchanan, activity JamesM., and GordonTullock. The Calculus full, by those potential winners outside a politof of Consent.Ann Arbor: University MichiganPress, ical system targeted for reform. 1962. The point is to move to a new political equi- Coase,Ronald."TheProblem SocialCost."J. Lawand of Econ. 3(1960):1-44. librium, and this implies changing the structure on which outcomes hang; after all, for the case Foster,WilliamE., and GordonC. Rausser."A PoliticalEconomic Rationale for Coupled Welfare Transfer of constant political technology, if changing the Policies." Dep. Agr. and Resour. Econ. Work. Pap. relative costs of political activity were a simple No. 498, Universityof California,Berkeley, 1988. matter of decisions made within the political Gardner,B. L. "EfficientRedistribution throughComsystem, then presumably it would already have Amer.J. Agr. Econ. 65(1983):225modityMarkets." been done. External groups (even entire na34. tions), who would gain coincidentally with the Rausser,GordonC. "PoliticalEconomicMarkets: PESTs and PERTsin Food and Agriculture." Amer.J. Agr. strengthenedpolitical power of internal groups, must therefore carry part of the responsibility of Econ. 64(1982):821-33. beginning the reform process; and they must be Rausser,GordonC., and Harryde Gorter."Endogenizing Markets." AgriculPolicy in Models of Agricultural prepared to share in the direct expense of intureand Governments an Interdependent in World,ed. creasing pro-reform activities. Alan Maunder and AlbertoValdes. Oxford:Oxford There are, in addition, less direct ways of UniversityPress, forthcoming. the cost of organizing pro-consumer lowering "Estimation of GordonC., and J. W. Freebairn. activities such as the provision of information Rausser, Preference An Functions: Application U.S. to Policy regardingthe welfare effects of government polBeef Import Policy."Rev. Econ.Statist.56(1974):437icies. Such transparencyanalysis has developed 49. a great many proponentsin the last several years. Robinson, Sherman,MaureenKilkinny, and Irma Adelin man. "TheEffect of TradeLiberalization AgriculAlthough greater information to potential bento tureon the U.S. Economy: eficiaries of reform may be necessary to motiProjections 1991."MacroeconomicConsequences Farm-support Policies. vate opposition to the present state of wealth of EconomAustralia: Centrefor International Canberra, transferschemes, there are significant reasons to ics, 1988. believe that improved knowledge will not be and PriceEquilibrium Linear PaulA. "Spatial Samuelson, sufficient. First, to place all the emphasis on Amer.Econ. Rev. 42(1952):283-303. Programming." the effects of a governmaking transparent "SomeEconomy-Wide Stoeckel,Andy,andJensBreckling. ment's agricultural policies implies a severe lack ComPolicies in the European Effectsof Agricultural of intelligence by those who bear the cost of Study." Macroecomunity: A GeneralEquilibrium wealth transfers.Yet, food and farmpolicies have Policies. Cannomic Consequences Farm-support of Centrefor International Economics, been in place for decades, consumers especially berra,Australia: 1988. have enjoyed ever-cheapening food prices, and