Economics of Public Problem - Solving

This article will focus on the economics of public problem-solving. It will provide an overview of the economic history of public problem-solving in the United States. This overview will serve as the foundation for discussions on the relationship between democratic values and public problem-solving as well as tools of economic analysis and public problem-solving. In addition, the relationship between public policy, funding structures, and public problem-solving will be described and analyzed. Numerous real world examples of public problem-solving will be discussed.

Keywords Economic Analysis; Problem Solving; Public Policy; Public Problems; Values

Business & Public Policy > Economics of Public Problem-Solving

Overview

Public problems such as poverty, child abuse, smoking, crime, aging and terrorism are characterized as undesirable conditions that impinge on a society. All undesirable conditions within society do not become classified as public problems. Citizens and their elected officials establish their public problem agendas based on their levels of tolerance for specific adverse conditions. Theoreticians use decision or choice theory, which studies how real or ideal decision-makers make decisions and how optimal decisions can be reached, to explain how public problems are solved in ideal circumstances. In reality, historical, social, and economic variables make many public problems difficult to solve if not intractable.

The U.S. government addresses and solves public problems through multiple means and strategies. In government, public administrators and politicians are responsible for solving many types of public problems. A common, generally applied problem-solving or decision-making model includes the following steps:

• Determine whether a problem exists.
• State decisional objectives, alleviations, or solutions.
• Identify the decision apparatus and possible action options.
• Specify alternatives.
• State recommendations.
• Ascertain ways to implement recommendations.

Public problems may be routine, out-of-the-ordinary, small-scale, or large-scale. Systematic decision-making processes may or may not be used in their entirety to solve or alleviate the public problem. Factors influencing the formal adoption and use of a problem-solving process or model include agency or department regulations, personal preference of the public administrator, and the variables of the public problem at hand (Hy & Mathews, 1978).

Problem solving strategies are often situation or condition-specific, requiring carefully selected problem-solving strategies and techniques such as the multiple criteria decision making model (MCDM), consensus or group decision making, ethical decision-making, and finance-based or budget-maximizing decision making. The federal government's problem-solving process involves activities such as intergovernmental collaboration, public budgeting, public policy, public education, and regulation (Andranovich, 1995). Important trends in public problem solving include increased community participation in government decision-making and collaborative public decision-making (Irvin, 2004).

While the federal government as a whole uses multiple problem solving models and approaches to solve and alleviate the public problems arising from, for example, overuse of the urban infrastructure, pollution, unemployment, public education, childhood poverty, aging Americans, sanitation problems, drunk driving, gangs and gun violence, nearly all of the federal government's problem-solving efforts and processes are significantly influenced by economics. The federal government, and its numerous agencies, is increasingly called upon by the public to improve financial and operating performance. The current government-society relationship is characterized by demands for government accountability in spending and programs. For example, current public budgeting is characterized by variables such as governmental accountability, performance requirements, and program justification.

The political economy of public problems, and closely related public policy, is a long-established area of study and interest. The economics of public problem-solving involves at least three different elements:

• The federal government prioritizes the value of economics, and a strong economy, when solving public problems.
• The federal government uses economic tools for analysis, such as strategic accounting, serial cost sharing, cost-based systems, activity-based costing system, and total unit cost-output model, when solving public problems.
• The federal government has budget formats and funding structures in place which influence the scope and parameters of problem-solving public policy.

This following section will provide an overview of the economic history of public problem solving. This section will serve as the foundation for later sections describing and analyzing the three ways, described above, that the federal government uses economic approaches and justifications to solve and alleviate public problems. In addition, a case study describing the economics of managed beach erosion will be included at the end of the article as an opportunity to examine the ways in which economics influence the definition and solution of a real world public problem.

Economic History of Public Problem-Solving

In the United States, the economic history of public problem solving, including the development and implementation of a wide range of fiscal and public policy as well as regulatory agencies, began in the late eighteenth century. Following the American Revolution, the individual economies of the states were faltering, paper money had little value, and there was conflict between borrowers and lenders. The original thirteen states came together to draft the U.S. Constitution, in part, to stabilize and strengthen the U.S. economy. The U.S. Constitution and its amendments were drafted to solve and alleviate social and economic problems.

From the Civil War through the beginning of the Industrial Revolution, the U.S. economy was characterized by cycles of growth and contraction. By 1920, the U.S. had begun mass production of standardized goods in factories and the practice of commercial advertising on the radio. The development of commercial radio meant that companies could promote their products and services to a larger audience of potential consumers than ever before. The federal government founded the Federal Communications Commission (FCC), an independent United States government agency that regulates interstate and international communications by radio, television, wire, satellite and cable, in 1934 to monitor, solve, and alleviate the public problems caused or exacerbated by telecommunications activity in society.

The Great Depression, the severe economic recession in America that lasted from 1930-1934, was caused by instability of the American economy created, in part, by new mass manufacturing processes, uneven distribution of wealth and profits, and the government's investment in new industries rather than agriculture. The Depression ended when President Franklin D. Roosevelt took office in 1933. Roosevelt's New Deal Campaign, an example of a successful public problem solving-campaign, outlawed gold coins, set farm quotas, and established government work programs to generate confidence and money within the U.S. economy.

In the 1930s, following the Great Depression, the United States government began a program and approach of economic problem-solving that created mixed fiscal and monetary policies in an effort to produce sustained economic growth and stable prices (for goods, services, and natural resources). The government, with a strong record in the latter half of the 20th century for controlling cycles of expansion and contraction, remains challenged by inflation and related problems of unemployment. The government, including budgets, policies, and regulatory agencies, has been growing steadily since the 1930s. In 1930, the federal government accounted for 3.3 percent of the nation's gross domestic product (GDP) while in 1999, the federal government accounted for 21 percent of the nation's gross domestic product (Conte, 2001). The scale and scope of the federal government has grown in the twentieth century in proportion to the demand from society for increased public problem-solving by government agencies and leaders.

Applications

Economic Approaches to Public Problem-Solving

Economics influences what public conditions citizens and their representatives consider to be public problems as well as the strategies that the federal government uses to alleviate or solve the public problem. The following three sections, including values and public problem-solving, tools of economic analysis and public problem solving, and funding structures and public problem-solving, combine to illustrate the ways in which economics influences the federal government's public problem-solving efforts.

Values & Public Problem-Solving

Public problems are categorically different than private problems. Examples of public problems include gun violence, beach erosion, domestic violence, drunk driving, teen pregnancy, low voter turnout, childhood poverty, gang colors worn in school, and homelessness. Examples of private problems include marital trouble, deciding between colleges, flat tires, deciding how to dress, or lack of childcare. Some issues, such as access to childcare, straddle the line between public and private problems. For many families, the cost of childcare may outweigh the financial benefit of a low-wage job, and for low-income families the conflict between employment and childcare can be an economic trap. Some researchers argue that government provided or subsidized childcare allows low-income earners to escape poverty (Huston, A.C., et al., 2011) and is therefore economically positive; whereas, others caution that policies requiring employment as a condition of public assistance come at a social cost (Albelda, R., 2011).

How do individual or general conditions become public problems? Public problems, such as poverty, child abuse, smoking, crime, aging, and terrorism, are characterized as undesirable conditions that impinge on a society. A society defines its public problems, its public agenda, through a process in which indicators, preexisting perceptions, and focusing events combine to create the push needed for policy change. The public problem definition process is often described as an issue of tolerance. The threshold model of collective behavior, as applied to public problem definition, argues that individuals have tolerance costs and thresholds that must be met before they will take a public stand and declare a condition, issue, or event to be a public problem. Individual tolerance thresholds vary based on their tolerance costs and values attached to siding with the majority (Wood & Doan, 2003).

Public and private problems often overlap but are usually solved through different means and approaches. Solving public problems is the combined responsibility of voters and their elected officials. The solutions to public problems always reflect the shared or majority public values of society. The relationship between public values and public problems illustrates why people and their government choose the public problem solutions that they do. Public problems have at least four main features:

• Public problems involve facts and values.
• Public problems are solved through value-based decisions and approaches.
• Public problems affect people as public citizens rather than as private individuals.
• Public problems occur in public settings rather than in private settings (Boyle, 2001).

Public problems are related to at least four main public values, guaranteed in the U.S. Constitution, including liberty, equality, community, and prosperity. Liberty refers to a person's freedom, choice, and individuality. Equality refers to equity, fairness, and justice for all. Community refers to safety, security, social order, and protected quality of life. Prosperity refers to efficiency, economy, and productivity for all people. These public values are the cornerstones of American civil rights and civil liberties as guaranteed in the U.S. Constitution. Americans often disagree about which values to prioritize and under what circumstances. The federal government often prioritizes the value of economic prosperity as shown, in part, by the government's expansive and enduring support for the private business sector.

Public problems involve choices for individuals and elected officials based on values and facts. Public choice refers to the situation in which the public and their elected representatives must decide which values and facts to prioritize and use when solving a problem. Public problems result when there is disagreement among the public and politicians about which value to prioritize when solving a problem in society. Public problems result when people disagree about which values are more important for promoting the common good. Public problems also occur when an issue or an event affects people as public rather than private citizens or when an issue or an event occurs in a public setting. For example, drinking alcohol to the point of impaired judgment is legal at home as a private citizen but illegal on shared city streets or roads where people must act as public citizens (Boyle, 2001).

Public problems are, for the most part, not directly solved by individuals in society. Instead, individual voters elect representatives who share their values to solve public problems on their behalf. Elected officials work together in government to solve public problems. People often disagree about the proper role and responsibility that government should undertake to solve public problems. Common areas of debate about the proper role of government in solving public problems, and legislating society in general, include scope, power, and finances. For example, some people want expanded social programs and spending and increased national security while others want an end to "big government" and a much smaller tax system (Boyle, 2001).

Tools of Economic Analysis & Public Problem-Solving

Current economic models that inform and structure federal public problem-solving include the practices of institutional and managerial economics. These two economic approaches advocate the use of specific tools of economic analysis to solve and alleviate public problems and make organizational decisions. Institutional economics focuses on understanding the role of human-made institutions in shaping economic behavior. Institutional economics considers efficiency to be a means of problem solving through the application of instrumental reasoning that facilities effective social functioning. Institutional economics works to help institutions reduce transaction costs (Klein & Miller, 1996).

Managerial economics, or business economics, applies microeconomic analysis to specific organizational decisions. Managerial economics offers tools of economic analyses that work to optimize an institution’s decisions based on economic objectives and goals. Common techniques of managerial economics include risk analysis, production analysis, pricing analysis, capital budgeting, and serial cost sharing. Risk analysis refers to the quantification techniques utilized to assess the associated risks of a specific decision. Production analysis refers to the economic techniques used to evaluate production efficiency, optimal factor allocation, costs, and economies of scale. Pricing analysis refers to economic techniques used to assess pricing decisions including transfer pricing, product pricing, price discrimination, price elasticity estimates, and optimal pricing method. Capital budgeting is an investment theory used to examine an agency’s capital purchasing decisions. Serial cost sharing is a mechanism used to apportion shared resources among its users as well as split the corresponding cost.

In addition to these tools, federal budget reform during the 1990s produced the zero-based budgeting model that works to justify and rank programs based on performance and economic efficiency. In this budget format, social programs, which are created to solve and alleviate a wide range of public problems, are ranked in importance and successfulness based on the relationship between economic efficiency and performance. Zero-based budgeting creates budgets that subject all programs, activities, and expenditures to a justification process that may or may not recognize and continue to fund socially-important programs (Morgan, 2002). The federal government uses tools of economic analysis that reflect the needs and standards of society at the time in which the tools were developed.

Funding Structures & Public Problem-Solving

Public problems are addressed, alleviated, and solved by government through the development and implementation of public policy. Public policy refers to the basic policies that provide the foundation for public laws. Public policy is often defined as a social goal, enabling objective, or social solution. The public policy process is a problem-solving activity that solves or alleviates a problem or conflict in society. For example, urban public policy regulates, oversees, and alleviates contemporary urban public problems such as health care, education, economic development, employment and training, nonprofit sector, immigration, housing and land development, welfare, drug control, environmental policy, transportation, local government, leadership, social policy, information access, poverty, historical preservation, and community development. Public policy, requested by society and enacted by government, bridges the gap between society and government. Public policy develops within a specific historical context, socio-cultural context, and political system.

The economic goals of the United States government include maintaining high levels of employment, establishing stable prices for goods and services, and controlling the pace of economic activity. The United States government uses the tools of fiscal policy and monetary policy to achieve those goals. Fiscal policy refers to expenditures by federal, state, and local governments and to the taxes levied to finance these expenditures. Fiscal policy supports and funds the federal budget, aids the federal government's social policies, and promotes overall economic growth and stability. Federal spending includes contracts, grants, loans, and direct payments such as social security.

In the early twentieth-first century, large concerns developed over the increasingly unaffordable cost of healthcare and the scientific community's consensus that carbon emissions were causing global climate change. After numerous attempts to pass reforms in the way healthcare is funded in the United States, the Patient Protection and Affordable Care Act was signed into law on March 23, 2010 (Sonfield, A., & Pollack, H.A., 2013). The mechanisms for funding the massive universal care program were complex and involved unprecedented private/public interrelationships and mandates that remained controversial throughout the lengthy rollout. Administration projections were optimistic; however, challenges to its feasibility were vociferous. Researchers, such as Macinko & Silver (2012) proposed methods for measurement and analysis to determine over time whether the extraordinary new entitlement program is successful in achieving its policy goals while remaining ecomonically positive. Climate change mitigation, like healthcare reform, was criticized as a problem for the free market to solve by economists who charged that government regulations are by nature inefficient and "job killers." The consequences of climate change were variously viewed as socially and economically catastrophic and overly pessimistic, but the challenge for policy makers was to measure the considerable social and economic costs of either acting or doing nothing (Jones, Clark & Tripidaki, 2012).

Once public and fiscal policies have been developed at either the federal or state level, policies require funds for administration and implementation. Congress established the modern system of grants-in-aid to support state and local governments in the early 20th century. Grants-in-aid refer to the federal funds appropriated by Congress for distribution to state and local governments to implement and support public policy initiatives. Congress awards four kinds of fiscal grants: categorical grants, block grants, project grants, and formula grants.

The funds for state and local public programs and policy implementation come from federal grants, as described above, as well as indirect taxes and personal income taxes. Trends in government grants to state and local governments have followed social and public policy interests over the past few decades. For example, state and local spending during the latter half of the 20th century was characterized by the need to finance and support public education and Medicaid (Penner, 1998). Social, fiscal, and public policy, shaped by the parameters of federal funding structures described above, address and alleviate a wide range of public problems.

The following section provides an in-depth example of a public problem to illustrate the influence of economics in defining and solving a real-world public problem.

Issues

The Economics of Beach Erosion Control

Beaches (defined as natural forms composed of sand and other loose sediments moved and deposited by waves, currents and storm over-wash) and the natural environment in general would seemingly be outside any discussion of the economics of public problem solving. In actuality, beaches, which are legally and socially considered to be a public good, are an increasingly common public problem. Public goods refer to items, locations, or events that are indivisible, jointly consumable, and non-exclusive in nature. Laws governing the use of a public good serve two main purposes:

• Common good rules and laws protect the common property from damage which would adversely affect the flow of services demanded.
• Common good rules and laws order uses in such a way as to reduce the elements of adversity among users.

Sandy beach zones, a common good with high land values, often suffer chronic erosion as well as storm erosion. Sandy beach zones experiencing erosion are considered by many citizens and politicians to be important public problems; the loss of developed sandy beaches is a major economic and social problem. Beach erosion is officially defined as a public problem in order to receive the following economic protections, often in the form of public use policy or fiscal subsidy, from society and government:

• Protection of valuable beach residences
• Protection of tourist-related businesses
• Protection of sandy beach space for recreation
• Protection against storm damage inland
• Protection of public infrastructure servicing beach users (Fischer, 1990)

Beach erosion is considered to be a public problem due to economic property losses caused by storms and hurricanes. The condition of beach erosion, an environmental condition exacerbated by over development, is defined as a public problem by citizens and their elected representatives when, and only when, beach erosion causes financial loss and damage to a sufficient number of citizens and communities (Fischer, 1990).

Conclusion

In the final analysis, citizens and their elected representatives work together to define public problems. Democratic government guarantees public choice in defining public problem agendas. The federal government works to address and solve public problems primarily through education, participation, and representation:

• The government solves public problems by educating citizens about problems and choices beyond their immediate self-interests.
• The government solves public problems by helping citizens understand the choices between these values by promoting opportunities for citizens to participate in public problem-solving and decision-making.
• The government solves public problems by helping citizens prioritize democratic values in framing public problems (Boyle, 2001).

The federal government, as empowered by founding documents such as the Declaration of Independence and the U.S. Constitution, is responsible for safeguarding the four democratic values of liberty, equality, prosperity, and security in the public problem-solving process (Boyle, 2001). While the government does indeed develop and implement public policy solutions that protect all four of these basic democratic values, the role of economics in public problem-solving, as described in this article, is pervasive and enduring.

Terms & Concepts

Economic Analysis: Study and understanding of trends, phenomena, and information that are economic in nature.

Federal Government: A form of government in which a group of states recognizes the sovereignty and leadership of a central authority while retaining certain powers of government.

Grants-in-Aid: The federal funds appropriated by Congress for distribution to state and local governments to implement and support public policy initiatives.

Public Choice: The situation in which the public and their elected representatives must decide which values and facts to prioritize and use when solving a public problem.

Public Good: An event, item, or location that is indivisible, jointly consumable, and non-exclusive in nature.

Public Policy: The basic policies that provide the foundation for public laws.

Public Problems: Undesirable conditions that impinge on a society.

Public Problem-Solving: The approaches and strategies that citizens and their elected representatives undertake to solve or alleviate public problems.

Threshold Model of Collective Behavior: A theory of public problem-solving that asserts that individuals have tolerance costs and thresholds that must be met before they will take a public stand and declare a condition, issue, or event to be a public problem.

Values: Personally and culturally specific moral judgments.

Bibliography

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Huston, A.C., Gupta, A.E., Walker, J., Dowsett, C.J., Epps, S.R., Imes, A.E., & McLoyd, V.C. (2011). The long-term effects on children and adolescents of a policy providing work supports for low-income parents. Journal of Policy Analysis & Management, 30, 729-754. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=65131852&site=ehost-live

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Jones, N., Clark, J., & Tripidaki, G. (2012). Social risk assessment and social capital: A significant parameter for the formation of climate change policies. Social Science Journal, 49, 33-41. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=73766627&site=ehost-live

Klein, P., & Miller, E. (1996). Concepts of value, efficiency, and democracy in institutional economics. Journal of Economic Issues, 30, 267-277. Retrieved Thursday, May 03, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9603276313&site=ehost-live

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Suggested Reading

Gerrits, L., & Moody, R. (2011). Envisaging futures: An analysis of the use of computational models in complex public decision making processes. Emergence: Complexity & Organization, 13(1/2), 96-114. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=65100691&site=ehost-live

Jun, J., & Storm, W. (1990). Social design in public problem solving. Public Administration Quarterly, 14, 19-30. Retrieved Thursday, May 03, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=7163606&site=ehost-live

Nelson, B., & Leone, R. (1999). Diversity and public problem solving: ideas and practice in policy education. Journal of Policy Analysis & Management, 18, 134-155. Retrieved Thursday, May 03, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=1487438&site=ehost-live

Romney, G. (1969). Public problem solving. Vital Speeches of the Day, 35, 329. Retrieved Thursday, May 03, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9926944&site=ehost-live