PUBLIC CHOICE

Chapter 7

2016 by McGraw-Hill Education Limited.

Learning Objectives
1. Use a diagram to illustrate the equilibrium in
Lindahls model of unanimity.
2. Explain what is meant by the voting paradox
and how it can lead to agenda manipulation.
3. State the median voter theorem for a direct
democracy.
4. Demonstrate that the effect of logrolling on
welfare is ambiguous.
5. Explain the implication of Arrows theorem
for democratic decision-making.
7-2

Learning Objectives
(cont)
6. Illustrate the median voter theorem for
elections in a representative democracy.
7. Explain the role of bureaucrats and how
their incentives may result in excessive
spending.
8. Identify the deadweight loss triangle and
rectangle that can arise from rent-seeking
activities.
9. Summarize the explanations for government
growth in the twentieth century.
7-3

Public Choice
The field that applies economic
principles to the analysis of political
decision-making
How well do various decision-making
procedures translate the preferences
of their citizens into collective
action?

7-4

LO1

Unanimity Rules
0
D rE

Adams share (SA)

Eves share (SE)

Direct Democracy

S*

Given efficient quantity level r*

and demand curves, Adam
pays 0-S* and Eve pays 0-S*.
Unanimity can result in
efficient level if Lindahl prices
tax share per individual
were allowed

D rA
0

r*

r per year
Lindahls Model

Figure 7.1
7-5

Direct Democracy
Feasibility of Unanimity
Rules

Practical problems

Strategic behavior: do people vote

sincerely or under report value to
escape tax liability?
Time to reach equilibrium given many
parties

7-6

Direct Democracy
Majority Voting Rules
Majority voting rule
one more than half of
the voters must favor
a measure for it to be
approved
However, majority
voting does not
always yield clear-cut
results
Given the voter
preferences to the
right, B always wins
against opponents

Voter
Choice

Denis
e

Rudy

Theo

First

Second

Third

Table 7.1

7-7

LO2
Majority Voting Does Not Always
Yield Clear-Cut Results: Double- vs.

Single-Peaked Preferences
Voting Paradox Community

preferences can be inconsistent

even though individuals
preferences are consistent
Given new preferences to the
right:
A vs. B A wins
B vs. C B wins
A vs. C C wins

Agenda Manipulation

Process of organizing order of

votes to ensure a favorable
outcome
Cycling when paired voting
on more than two possibilities
goes on indefinitely without a
conclusion ever being reached

Voter
Choice

Denis
e

Rudy

Theo

First

Second

Third

Table 7.2

7-8

Graphing Preferences
Utility

Single-peaked preferences

Rudy

Double-peaked preferences
Denise
Angelina

A
Figure 7.2

Missiles
7-9

More Examples of DoublePeaked Preferences

Can occur with availability of private
substitutes for a publicly provided good
Example: public park vs. private country
club

Can occur with issues that cant be

ranked along single dimension
Example: abortion clinic vs.
adult book store vs.
armed forces recruitment office
7-10

Direct Democracy

LO3

The Median Voter Theorem

As long as
preferences are
single peaked, the
outcome of majority
voting reflects the
median voter
preferences
Hueys preference of
$150 spending would
prevail in majority
voting
Table 7.3
7-11

Majority Voting on the

Quantity of a Public
Good
P
r

MC

D rE
D rA

DrA+E+T

2
D rT
45 60

75

r per year

Figure 7.3
7-12

Direct Democracy

LO4

Logrolling can Improve

Welfare
The trading of votes to

obtain passage of a
package of legislative
proposals
If projects voted on 1
at a time, all lose
Hospital only Melanie
Library only Rhett
Pool only Scarlet

Solution is for Melanie

to vote for library if
Rhett votes for
hospital, etc
Table 7.4
7-13

Direct Democracy

LO4

Logrolling can also Lower

Welfare

Welfare
lowered if vote
trading leads
to projects
with negative
net benefits
being passed

Table 7.5
7-14

Direct Democracy

LO5

Arrows Impossibility Theorem

In a democratic society, a collective decisionmaking rule should satisfy the following criteria:
1. It can produce a decision whatever the
configuration of voters' preferences
2. It must be able to rank all possible outcomes
3. It must be responsive to individuals preferences
4. It must be consistent
5. Independence of irrelevant alternatives
6. Dictatorship ruled out

Societys choice mechanism should be logical

and respect individuals preferences
7-15

Direct Democracy

LO5

Arrows Impossibility Theorem

(cont)

Unfortunately, all conceivable voting schemes

have some potential for being unfair or producing a
paradoxical result
The meaning of theorem is that a fair, consistent
rule is not necessarily impossible to find, but it is
not guaranteed a society will find one
Buchanans view: Despite being inconsistent,
majority rule has other benefits
Arrows theorem implies social welfare functions
are useless, but most economists believe they
provide valuable insights
7-16

Representative
Democracy

LO6

Median Voter Theorem for

Elections

Figure 7.4

7-17

Representative Democracy
Elected Politicians
The candidate who adopts the median
position (M) will defeat the candidate who
adopts the position away from the median
(S)
Two-party systems tend to be stable
because they stake out positions near
center
Replacement of direct referenda by
representative system has no effect on
outcomes
7-18

Representative
Democracy
Other Factors Influencing
Voting
Single-dimensional
rankings

Two-party system
Ideology
Personality
Leadership
Decision to vote

7-19

Representative
Democracy

LO7

Public Employees

Function of bureaucrats

Implement policy
Provide technical expertise in the design and
execution of programs and policies
Provide institutional memory
Provide accurate documentation to ensure
Equal treatment for eligible citizens
Prevent corruption

Goals of bureaucrats
Fulfill wishes of electorate and representatives
Perhaps increasing power and their own status
Size of bureaucrats budget

7-20

Representative
Democracy
Special Interests

Establishment of Special Interest

Groups
Source of Income: Capital or Labor
Size of Income
Source of Income: Industry of
Employment
Region
Demographic and Personal
Characteristics
7-21

Representative
Democracy

LO8

Special Interests: RentSeeking

$
Rent: Higher than normal
returns.
Rent-seeking: Using
government to obtain rents

Pcartel

c
Deadweight loss
Rents

Pc

S = MC

e
D

Qcartel

Figure 7.5

Qc
Hectolitres of milk
MR
7-22

Representative
Democracy
Other Actors

The judiciary
Journalists
Experts

7-23

Explaining Government
Growth
Government Expenditure as a
Percent of GDP in Selected
Countries

Table 7.6
7-24

Explaining Government
Growth

LO9

Citizen Preferences: G = f(P, I)

G = Median voters demand of public sector goods and

services
P = Price of public sector goods and services
I = Income

Marxist View
The public sector must expand to absorb private
excess production.

Chance Events
Wars, recessions

Income Redistribution
7-25

Explaining Government
Growth
Controlling Government
CommitmentsGrowth
made by governments
in the past

Uncontrollable expenditures
Entitlement programs

Are political institutions

fundamentally flawed? Strict
budgetary rules

7-26

Chapter 7 Summary
Political Economy applies economic principles to analysis of
political decision-making
Economists have studied several methods for choosing
levels of public goods in a direct democracy:
Lindahl pricing results in a unanimous decision to provide an
efficient quantity of public goods, but relies on honest
revelation of preferences.
Majority voting may lead to inconsistent decisions regarding
public goods if some peoples preferences are not single
peaked.
Logrolling allows voters to express the intensity of their
preferences by trading votes. However, minority gains may
come at the expense of greater general losses.

Arrows Impossibility Theorem states that, in general, it is

impossible to find a decision-making rule that
simultaneously satisfies a number of apparently reasonable
criteria. The implication is that democracies are inherently
prone to inconsistency regarding public goods and other
decisions.
7-27

Chapter 7 Summary
(cont)
Explanations of government behaviour require studying the
interaction of elected officials, public employees, and
special interest groups.
Under restrictive assumptions, the actions of elected
officials mimic the wishes of the median voter.
Public employees have an important impact on the
development and implementation of economic policy. One
theory predicts that bureaucrats attempt to maximize the
size of their agencies budgets, resulting in oversupply of
the service.
Rent-seeking private citizens form groups to influence
government activity. Special interests can form on the
basis of income source, income size, industry, region, or
personal characteristics.
The growth of government has been rapid by any measure.
Proposals to control the growth in government focus on the
imposition of strict budgetary rules.
7-28