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[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]