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We offer a psychological perspective to explain the failure of governments to create near-Pareto improvements. Our tools for analyzing these failures reflect the difficulties people have trading small losses for large gains: the fixed-pie approach to negotiations, the omission bias and status quo bias, parochialism and dysfunctional competition, and the neglect of secondary effects. We examine the role of human judgment in the failure to find wise trade-offs by discussing diverse applications of citizen and government decision making, including AIDS treatment, organ-donation systems, endangered-species protection, subsidies, and free trade. Our overall goal is to offer a psychological approach for understanding suboptimality in government decision making.
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