There are many government policies, similar to airline bailouts that from an economic perspective don't make some sense at all. Politicians have an inducement to remain the economy strong as servings are reelected at a much advanced rate during booms than busts.
So why do so numerous government strategies make such small economic sense?
The most excellent answer I've seen to this question that is almost 40 years old. The Logic of Collective Action makes clears why a number of groups are able to have a larger control on government strategy than others. I'll give a succinct outline of The Logic of Collective Action and show how we can make use of the results of the book to make clear economic strategy decisions. Any page orientations come from the 1971 edition of The Logic of Collective Action.
You would anticipate that if a group of people have an ordinary interest that they'll obviously get together and fight for the common objective. Olson states, though, that this is usually not the case:
"But it is not in fact right that the idea that sets will act in their self-interest pursues logically from the premise of balanced and self-interested actions. It does not follow, since all of the persons in a group would gain if they attained their group objective that they would act to get that objective, even if they were all balanced and self-interested. Certainly unless numerous persons in a group is moderately small, or unless there is compulsion or some other special device to create individuals work in their common interest, rational, self-interested individuals will not act to achieve their common or group interests."
We can see why this is if we look at the classic example of perfect competition. Under perfect competition there is very large number of producers of an identical good. Since the goods are identical, all firms end up charging the same price, a price which leads to a zero economic profit. If the firms could collude and decide to cut their output and charge a price higher than the one that prevails under perfect competition all firms would make a profit. Although every firm in the industry would gain if they could make such an agreement, Olson explains why this does not happen:
"Since a consistent price must prevail in such a market, a firm cannot wait for a higher price for itself if not all of the other firms in the manufacturing have this higher cost. But a firm in a viable market also has an interest in selling as a lot as it can, until the cost of creating another unit exceeds the cost of that unit. In this there is no ordinary interest; each firm's interest is in a straight line opposed to that of each other firm, for the additional the firms sell, the lower the cost and income for any given firm. In brief, while all firms have a common curiosity in a higher price, they have opposed interests where output is unease."
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