Asymmetry and Corrective Public Policy

Abstract

In the context of inefficiency due to government intervention, resource misallocation can be aggravated if wasteful resources (lobbying, rent-seeking or rent-avoidance efforts) are spent by interest groups that attempt to influence the outcome of the political decision-making process in their favor. The outcome of this process is usually uncertain. When some inefficient public policy is proposed, for example, because of some effective political constraints, typically some interest groups are interested in its approval and implementation, whereas other groups resist it preferring the status quo. The main objective of this chapter is to specify the conditions that ensure the existence of an effective corrective tax-transfer policy that complements an existing inefficient public-policy proposal. Effectiveness of the corrective policy means, first, that it secures an efficient contest outcome. Secondly, that given the existing inefficient policy proposal, it is optimal from the viewpoint of both interest groups.