Contents

1
Introduction to Public choice

Direct Democracy

3
Nguyen Kim Lan, MA Lecture of Public economics, FTU kimlan_ftu@yahoo.com 0917766179

Representative democracy

1. Introduction to Public choice

Private choice Individual preference Private decision: the decision maker knows his own preferences Public choice Collective preference Public decisions: the decision maker has to ascertain the preferences of those on whose behalf he is making the decision Decisions are made collectively Congress decide to spend the public money Have effects on everyone (compulsory)

1. Introduction to Public choice

Different voting procedures are different ways to aggregate individual preferences Direct democracy Representative democracy

Decisions are made on an individual basis Individual decides to spend his own money Have effect on individuals only

2. Direct democracy
The members in the community vote directly

2.1. Unanimity voting

100% VOTE YES

TAX PRICE

Unanimity voting

LINDAHL EQUILIBRIUM

Majority voting -Simple majority voting -Two-thirds majority voting

PROBLEMS

Lindahl equilibrium
Erik Robert Lindahl (November 21, 1891 in Stockholm) A Swedish economist and a member of the Stockholm school. In 1919, Lindahl proposed a method of financing public goods that was close to a free market solution and is today known as benefit pricing. This methods leads to a so called Lindahl equilibrium.

Lindahl equilibrium
Tax price DG

Collective demand curve F TG tB E tA DA Quantity of pub goods 0 QG Vertical sum of individual demand curves DB

Lindahl equilibrium
Supposed that there are two persons in society Public good: firework First, the government announces tax price for firework Each person express how much firework they want to see at this tax price If the quality of firework selected by each person is different, then the government will adjust the tax price (increase tax price to who wants more firework and lower tax to who wants less) in order to find a tax price where both persons want the same amount of firework => Lindahl equilibrium

Lindahl equilibrium
Problems: Benefit taxation => Individuals do not have incentive for truthful revelation of preferences => free rider Problem of preference aggregation => unfeasible Takes time to find out the tax price which absolutedly aggree in terms of quantity

2.2. Majority voting

Voting paradox

2.2. Majority voting

2.2.1. Majority voting equilibrium
First Person1 Person2 Person3 A C B B C B A C A

Voting equilibrium

A > 50% say Y

Arrows impossibility theorem

Second Third

Multiple picked preference

Median coter theorem

2.2. Majority voting

2.2.2.Voting paradox
First Second Third Person1 Person2 Person3 A C B B C A B C A

2.2. Majority voting

Voting paradox voting cycles): no clear winner In that case, it is important to control the agenda, the order in which the votes occur

2.2. Majority voting

Kenneth Joseph Arrow (born August 23, 1921) is an American economist and joint winner of the Nobel memorial Prize in economics His most significant works are his contributions to social choice theory,notably Arrows impossibility theorem", and his work on general equilibrium analysis

2.2. Majority voting

2.2.3. Arrows impossibility Transitivity: If the rule shows that A is preferred to B, B is preferred to C, then A should be preferred to C => avoid cyclical voting Nondictatorial choice: in a democratic society, a meaningful mechanism must ensure that the outcomes do not simply reflect the preferences of a single individual Independence of irrelevant alternatives: the outcome should not depend on whether there is a third alternative