Out of Sight, Out of Mind: How Opportunity Cost Neglect Undermines Democracy

Abstract

Every government program has an opportunity cost, which consists of the private and public goods that society must forgo to make the program possible. In evaluating government programs, rational voters would take opportunity costs into account. Unfortunately, opportunity costs are usually implicit, and psychologists have shown that decision makers tend to irrationally ignore implicit information while giving too much weight to salient situational elements. This Article presents evidence that the bias against implicit information causes voters to neglect the opportunity costs of government programs. The Article also explains for the first time the implications of opportunity cost neglect for democracy.

Voters’ neglect of opportunity costs has far-reaching consequences. Ignoring the sacrifices required by government programs makes them more appealing. As a result, opportunity cost neglect artificially increases the demand for government spending, tax expenditures, and regulation. In particular, the failure to consider opportunity costs helps explain why the federal government’s budget is on an unsustainable path. Opportunity cost neglect causes voters to demand a high level of government spending even though they are unwilling to pay for it, which leads to chronic budget deficits.

Opportunity cost neglect also influences the government’s choice of policy instruments. Voters tend to support policies that conceal tradeoffs. This explains why voters generally prefer tax expenditures to similar direct spending programs. It also explains why, despite economists’ objections, voters prefer to address global warming through command-and-control regulations rather than a carbon tax.

In addition, voters’ neglect of opportunity costs is relevant to the debate over the proper role of government. Legal scholars usually emphasize the market failures resulting from irrationality. They argue that irrational consumers make bad choices that justify a larger role for government. But opportunity cost neglect and other failures of rationality also result in government failure. Irrational voters demand policies that they would otherwise oppose resulting in substantial damage to society. Consequently, contrary to conventional wisdom, irrationality arguably strengthens the case for limited government.

Keywords: opportunity cost, irrationality, public choice, behavioral public choice, behavioral law and economics, law and psychology, government failure, tax expenditures, regulation, budget deficit, opinion research, carbon tax