Wednesday, June 25, 2008

Power of interest groups

It is widely known that small focussed interest groups command disproportionately high influence in the policy making corridors than much larger, but diffused focus groups. The late Mancur Olson had explored the power of small interest groups like cotton-farmers, steel-producers, and labor unions, who have strong incentives to form political lobbies and influence policies in their favor. He concluded that wherever the benefits of a policy are concentrated among a few and costs diffused among the whole (or major share) population, there is likely to be less resistance in the implementation of that policy.

Despite their interests standing in opposition to the interests of the consumers and the economy as a whole, the diffused nature of the opposition ensures that there is little resistance to implementing these policies. Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline.

David Leonhardt draws attention to the power of interest groups in the context of Medicare reforms in the US. Medical equipment makers and pharmaceutical companies are a strong and focussed interest group with entrenched interests. As the article shows, they supply their products to Medicare at prices which are far in excess to the prevailing market rates and are strongly resisting all attempts to make procurement more competitive. The pharma companies and medical equipment makers are a small and focussed coalition, whereas the Medicare consumers are a large population, thereby ensuring that resistance is not built up.

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