Question

Tammy Hall is the mayor of a large U.S. city. She has just established the Office of Window Safety. Because windows sometimes break and spray glass shards, every window in the city will now have to pass an annual safety inspection. Property owners must pay the S5-per-window cost-and by the way, Tammy has made her nephew the new head of the Office of Window Safety. This new policy is an example of: a. Political corruption. b. Earmarks. c. Rent seeking. d. Adverse selection.

Short answer

This policy is an example of political corruption.

Step-by-step solution

Define Each Term

Let's start by understanding each of the given options. Political corruption refers to the use of power by government officials for illegitimate private gain. Earmarks are provisions in legislation that direct funds to specific projects, often benefiting a legislator's district. Rent seeking involves individuals or groups trying to obtain economic gain from others without reciprocating any benefits back to society through wealth creation. Adverse selection refers to a situation where one party in a transaction has more or better information than the other, often resulting in an imbalanced and inefficient outcome.

Analyze the Situation

The scenario describes the establishment of a new government office and policy by Tammy Hall, who has appointed her nephew as the head of this office. This implies a personal gain for her family, possibly using her political influence.

Match the Scenario to the Correct Term

Tammy Hall's actions of appointing her nephew to a paid position after creating a potentially unnecessary office and policy, suggests misuse of power for personal gain. This aligns with the definition of political corruption.

Conclusion: Identify the Best Choice

The situation is best described by option (a) Political corruption, as it involves unethical conduct by a public official for personal benefit.

Key concepts

Rent Seeking

Rent seeking is a term that describes activities where individuals or groups aim to increase their own wealth without generating any new wealth or value for society. Imagine someone lobbying the government to grant them an exclusive license or monopoly. This effort does not create new products or services but rather redirects societal resources toward their benefit.

Steps often associated with rent seeking include:

• Manipulating the political landscape to gain preferential treatment, such as subsidies or tariffs.
• Engaging in activities that maximize personal wealth at the cost of societal well-being.

This can lead to inefficiencies as resources are allocated based on political influence rather than economic benefits, stifling innovation and competition.
To clearly understand rent seeking, remember that, unlike entrepreneurs who create value, rent seekers focus on capturing existing wealth.

Earmarks

Earmarks refer to provisions within legislation that direct government funds towards specific projects, often benefiting a confined group or the constituents of a particular legislator. These allocations are not necessarily competitive or need-based and can be seen as a tool to garner political favor.

Key characteristics of earmarks include:

• Often inserted in larger bills without thorough debate or oversight.
• Benefiting specific districts, possibly as a form of political trade-off or returning favors.
• Can lead to increased government spending without clear accountability.

For instance, a senator might add an earmark to a bill to fund a new highway in their home state, ensuring favorable views from local voters.
This can contribute to budget imbalances as funds are directed based on political expediency rather than societal needs.

Adverse Selection

Adverse selection is a situation where one party in a transaction possesses more detailed or accurate information than the other party, potentially leading to an inefficient outcome.

This concept is commonly seen in insurance markets. For example:

• Health insurance may attract applicants with higher health risks, as they have more reason to seek coverage.
• The insurer lacks complete information about the individuals' actual health status, resulting in a mismatched assessment of risk.

Ultimately, adverse selection can cause market failures if the informed party's private knowledge undermines fair trade practices. To remedy adverse selection, mechanisms such as signaling and screening are used, where parties with extra information convey credible attributes (signaling) while others seek relevant details to make informed decisions (screening).
Understanding adverse selection helps in creating fairer and more efficient markets.