Do government bureaucracies misallocate resources? If so, how and why? Can you list one possible way to limit the negative effects of special interests such as bureaucracies?
What will be an ideal response?
Yes, government bureaucracies misallocate resources by producing too much output. This occurs because bureaucrats have strong incentives to maximize the size of their budgets. Combined with the fact that bureaucracies have several bargaining advantages over legislatures, this will result in an output level higher than optimal. One possible way to limit the negative effects of special interests is fiscal federalism, where government functions are devolved to the lowest level of government feasible.
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