1889 Institute: The problem of diffuse costs and concentrated benefits

The Problem of Diffuse Costs and Concentrated Benefits

by Benjamin Lepak

Do you ever observe a seemingly illogical government program or spending decision and ask, “How is it that no one has fixed that?” This often takes the form of a curious headline (Save Federal Funding for the Cowboy Poets!) that doesn’t seem real.

Often, this phenomenon results from the problem of diffuse costs and concentrated benefits.



Consider a hypothetical law that imposes a $1 tax on everyone in the United States with the proceeds given to one individual for unrestricted use as he sees fit. The people harmed by such a law will not be very motivated to spend the time and effort to convince Congress to change it. They will resent supporting such an illegitimate cause, but the lost dollar isn’t worth the trouble of doing something about it.

Conversely, it’s hard to imagine something more motivating to the recipient than receiving an easy $350 million. He would fight hard to protect his privileged position with lobbyists and ad campaigns about the wonderful things he does with the money, and would donate to the campaigns of friendly candidates. All funded with his un-earned government largesse.

Often, the benefits of a given policy are concentrated in a relatively small number of people or interests, yet the costs are spread out to a great many. The impetus for individual action to maintain or change the policy is very real for the beneficiaries, and virtually nonexistent for the payers.

This phenomenon crops up throughout our public policy debates. Why is it so difficult to close a military base? Why do restrictive occupational licensing regimes persist? Why do silly or bloated programs just get more bloated? In each case, the costs are diffuse and the benefits concentrated.

Consider the extraordinary cost of Oklahoma’s wind energy subsidies, and perhaps more revealing, the herculean political effort to protect those subsidies. As a payor of that program, could you pinpoint exactly how much your contribution to the wind subsidy was and when it started? Did you even notice it? Probably not.

Any government expenditure that does not confer a near universal benefit on the public should be viewed with extreme skepticism. Likewise, legislators owe it to taxpayers to view every government expenditure as if it will be paid out of legislators’ own pockets. This would concentrate the mind in a manner never achieved when costs are viewed as just a little bit at a time spread out across millions of people.

It may be trite to point out that individuals are more judicious with their own money than with the money of others, but that makes it no less true.

Benjamin Lepak is Legal Fellow for 1889 Institute.