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Chapter 5
Public Choice and the Political Process
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The Supply of Public Goods Through Political Institutions
Public Choice involves decisions being made through political interaction of many persons according to pre-established rules.
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Political Equilibrium A political equilibrium is an agreement
on the level of production of one or more public goods, given the specified rule for making the collective choice and the distribution of tax shares among individuals.
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Tax Shares or Tax Prices
Tax shares, sometimes called tax prices, are pre-announced levies assigned to citizens.
They are a portion of the unit cost of a good proposed to be provided by government.
ti = tax share to individual i
ti = average cost of good
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Individual's Choice Individuals make choices given their
most preferred political outcomes. Each person will favor the quantity of
the government-supplied good corresponding to the point at which the person’s tax share is exactly equal to the marginal benefit of the good to that person.
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Figure 5.1 The Most Preferred Political Outcome of A Voter
Tax per Unit of Output
ti
MB i
Q*
Z
Ta
x
Output per Year 0
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The Choice to Vote or Not Rational Ignorance is the idea that, to
many voters, the marginal cost of obtaining information concerning an issue is greater than the marginal benefit of gaining that information. This leads the voter to fail to gather the information and then not to vote.
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Determinants of Political Equilibrium the public choice rule average and marginal costs of the
public good information available on the cost and
benefit the distribution of the tax shares distribution of benefits among voters
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Figure 5.2 Political Equilibrium Under Majority Rule With Equal Tax Shares
350 MC = AC
50 t
MB
E
Ma
rgin
al B
en
efi
t,C
os
t, a
nd
Ta
x (
Do
llars
)
Security Guards per Week 0 1 2 3 4 5 6 7
MBA MBB MBCMBF
MBG MBHMBM
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Median Voter Model The median voter model assumes that
the voter whose most-preferred outcome is the median of the most-preferred political outcomes of all those voting will become the political equilibrium.
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Voting to Provide Security Protection and Election Result under Simple
Majority Rule Increase Security Guards per Week to:
1 2 3 4 5 6 7
Voters A Y N N N N N N
B Y Y N N N N N
C Y Y Y N N N N
M Y Y Y Y N N N
F Y Y Y Y Y N N
G Y Y Y Y Y Y N
H Y Y Y Y Y Y Y
Result Pass Pass Pass Pass Fail Fail Fail
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Implications of Median Voter Model Only the median voter gets his most-
preferred outcome. Others get either too little or too much.
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Political Externalities Political Externalities are the losses in
well-being that occur when voters do not obtain their most-preferred outcomes, given their tax shares.
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Political Transactions Costs Political Transactions Costs are the
measures of the value of time, effort, or other resources expended to reach or enforce a collective agreement.
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Uniqueness and Cycling of Outcomes Under Majority Rule
Voter First Choice Second Choice Third Choice
A 3 2 1
B 1 3 2
C 2 1 3
Voter Rankings For Fireworks Displays per Year
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Preferences Single-peaked preferences
a unique optimal outcome exists
Multi-peaked preferences
as people move away from their most preferred outcome, they become worse off until a certain point. After that point, as they move further away from their most-preferred outcome they become better off.
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Figure 5.3 Voter Rankings of Alternatives
Fireworks Displays per Year
Ne
t B
en
efi
t fo
r A
Single Peak
0 1 2 3
Fireworks Displays per Year
Ne
t B
en
efi
t fo
r A Single Peak
0 1 2 3
Ne
t B
en
efi
t fo
r A
Single Peak
0 1 2 3
Ne
t B
en
efi
t fo
r A
Multiple Peaks
0 2 3 1
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Election 1: How Many Fireworks Displays per Year,
1 vs 2 B votes for 1 A and C vote for 2
Result 2 wins
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Election 2: How Many Fireworks Displays per Year,
3 vs 1 A votes for 3 B and C vote for 1
Result 1 wins
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Election 3: How Many Fireworks Displays per Year,
2 vs 3
C votes for 2 A and B vote for 3
Result 3 wins
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Pairwise Cycling Pairwise cycling is a phenomenon in
which each outcome can win a majority, depending on how it is paired on a ballot.
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Arrow's Impossibility Theorem It is impossible to devise a voting rule
that meets a set of conditions that can guarantee a unique political equilibrium for a public choice.
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Conditions of Arrow’s Impossibility Theorem
All voters have free choice; no dictator. We cannot rule out multi-peaked preferences. If all voters change their rankings of a particular
alternative, the public choice that emerges must not move in the opposite direction.
Public choices are not influenced by the order in which they are presented.
Public choices must not be affected by the elimination or addition of alternatives to the ballot.
Public choice, like all economic choices, should be transitive.
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Cause of Cycling: Multi-peaked preferences
Voter Rankings For Fireworks Displays per Year: All Voters with Single Peaked Preferences
Voter First Choice
Second Choice
Third Choice
A 3 2 1
B 1 2 3
C 2 1 3
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Election 1: How Many Fireworks Displays per Year,
1 vs 2
B votes for 1 A and C vote for 2
Result 2 wins
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Election 2: How Many Fireworks Displays per Year,
3 vs 1 A votes for 3 B and C vote for 1
Result 1 wins
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Election 3: How Many Fireworks Displays per Year,
2 vs 3 A votes for 3 B and C vote for 2
Result 2 wins
Net Result: if “2” is on the ballot, it wins
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Figure 5.4 The Median Peak as the Political Equilibrium under Majority Rule
Ne
t B
en
efi
t Medium Peak
(Voter C)
Fireworks Displays per Year 0
Peak for Voter A
Peak for Voter B'
1 2 3
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Figure 5.5 Declining Marginal Benefit of a Pure Public Good, Meaning That Preferences are Single Peaked
MB
t
Q* 0
Ma
rgin
al B
en
efi
t a
nd
Ta
x p
er
Un
it
Ne
t B
en
efi
t
Output of a Pure Public Good
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Political Processes Constitutions Minority Rule Majority Rule
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Costs and Benefits of Collective Action
Benefit: decrease in political externalities
Cost: increase in political transaction costs
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Possible Alternatives Methods Unanimity Relative unanimity (2/3, 7/8 etc.) Plurality rule (more than 3 outcomes
possible) Point-count voting (enables voters to
register the intensity of their preference) Instant Runoffs
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Political Institutions in U.S. Cities In the United States, municipal government takes two basic forms.
City Manager Form: The city manager makes day-to-day decisions, and advises elected officials. The mayoral and council elections are typically nonpartisan.
Mayor – City Council Form: The mayor makes day-to-day decisions and elections are typically partisan.
Researchers have found that relative to cities run by managers, those run by elected mayors:
have greater capital stock (roads, parks, police and fire stations), use relatively less labor in providing public services, spend the same amount of money.
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Figure 5.6 The Median Voter And Political PlatformsN
et
Be
ne
fit
Output of Government Goods and Services per Year 0
Net Benefit for the Median Voter
Q*
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Forms of City Government and their Effects on Spending Manager/Council Government
Unelected city manager makes most executive decisions, with policy recommendations by elected city council.
Mayoral Government Elected mayor makes most executive decisions.
Results: Similar total expenditures Mayoral systems utilize more capital intensive
public goods production.
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Figure 5.7 Number of Voters and Government OutputN
um
be
r o
f V
ote
rs
Output of Government Goods and Services per Year 0 Q*
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Logrolling or Vote Trading
Logrolling is the act of voting for something you would ordinarily vote against so that someone else will vote for something that they would ordinarily vote against.
This is typically done when people care deeply about passage of their issue and less about other issues.
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Implicit Logrolling Implicit logrolling occurs when political
interests succeed in pairing two (or more) issues of strong interest to divergent groups on the same ballot or the same bill.
The willingness of each special-interest group to vote for the combined package is a function of the relative intensity of preference on the two issues.
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State Government Spending and the size of the Legislature The theory of logrolling suggests that, as more
districts are available to distribute the costs of public spending, there will be more incentives for individual legislators to engage in vote trading to expand state government spending.
Researchers found a positive relationship between the size of the state Senate and spending.
Spending on highways and education were most affected by the size of the legislature.
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Figure 5.8 Logrolling
250
1
100 t
300 MC
200 t
600 MC = MSC
250
1
500
250
1
100 t
300 MC
MB
0
B
Ma
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efit
,C
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t, a
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x (
Do
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)
MBC MBA MBB
MBC
MBB
MBA
MBA
MBB
MBC
A
0
Ma
rgin
al B
en
efit
,C
os
t, a
nd
Ta
x (
Do
llars
)
Fireworks Displays per Week
0
C
Ma
rgin
al B
en
efit
,C
os
t, a
nd
Ta
x (
Do
llars
)
Security Guards and Fireworks Displays per Week
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Special Interests Special Interests are groups that lobby on particular
issues. An example of a special interest is unions and/or
steel companies lobbying for Tariffs and Import Quotas to protect their jobs or profits.
Efficiency losses per job saved almost always exceed the pay of the retained worker.
Estimates of the net effect run between –$9000 and –$38,000
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Bureaucracy and the Supply of Public Output Officials measure their power in terms
of the size of their budgets, not the efficiency of the outcomes they generate. This causes bureaucrats to have a self-interest in inefficiently high levels of government spending.
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Figure 5.9 Bureaucracy and EfficiencyA
Output per Year
0
Ben
efit
an
d
Co
st (
Do
llar
s)
Output per Year
B
Ben
efit
an
d
Co
st (
Do
llar
s)
B Q’
A
B
QB
TSB'
TSB
TSC
MSC
MSB
*
*
Q
E
Q
