[Note for bibliographic reference: Melberg, Hans O. (1997), How bureaucracies
waste resources - And how it could be avoided http://www.oocities.org/hmelberg/papers/970210.htm]
How bureaucracies waste resources
- And how it could be remedied
by Hans O. Melberg
I recently heard on the news that a patient received more money in compensation for
travelling expenses to a far-away hospital for dialysis treatment than it would cost to
buy a dialysis machine for a small hospital close to him. The obvious response to this
absurd situation is to ask why the authorities did not buy a dialysis machine for the
hospital instead of wasting their resources on paying for expensive travels. Everybody
would gain from this move. The patient since he did not have to travels so far; The
hospital which would get a dialysis machine; And, the authorities would save money. The
questions are then: How could this situation arise? Is this an isolated instance or is it
an example of a more general phenomena. Finally, are there any cures?
The answer to the first question is easy and obvious. Although the government
ultimately pays for both the dialysis machine and the travelling expenses, there are two
separate agencies buying hospital and paying for the expenses people have travelling to
hospital. This means that the agency responsible for paying travelling expenses cannot
agree to pay for the dialysis machine.
More generally, the problem is one of externalities. The decision of agency A has
consequences for agency B, but these consequences are not considered since agency A only
cares about the consequences directly related to it. In this case, the small hospital has
made a decision not to have a dialysis machine and this has consequences for the agency
that has to pay for the patients travelling expenses since they have to pay these
expenses. There are probably many other examples of the same. For example, a person may be
on the dole, costing more money than it would take to subsidize an employer to hire the
man.
Are there any cures? There are some easy ways out, but one also has to consider the bad
side-effects of the cure. Maybe the cure turns out to be worse than the disease. Consider
two easy ways out: One, centralize government decision-procedures. Second, allow agencies
more freedom in their spending-decisions. Now, both these solutions have problems. The
first one - centralization - creates a need for information to flow undistorted from the
bottom to those making decisions. Unfortunately, there is a tendency for this flow to be
distorted in heavily centralized organizations. Hence, with this cure the quality of the
decisions may detorierate because of the distorted information received by the
decision-makers. The second cure may have a problem since it creates a bad-incentive
system. If you give employers a subsidy to employ unemployed persons, they might not hire
the best person. Moreover, it would pay to reduce the number of people employed in order
to re-hire some other people getting the subsidy. Finally, why work hard to gain
qualifications when you will gain employment in any case - the less you work, the higher
the subsidy!
Overall, I am unsure about the net-effects of the two proposed solution. I am also
unsure if I can come up with a better solution than to work on the incentive-system facing
the people in this game.
See also:
Externalities, bureaucracies and tradable budget (Observation,
29. April 1996) (10)
[Note for bibliographic reference: Melberg, Hans O. (1997), How bureaucracies
waste resources - And how it could be avoided http://www.oocities.org/hmelberg/papers/970210.htm]