Chapter 5

Public Choice and the Political

Process

1
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.

2
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.

3
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
Σ ti = average cost of good
4
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.

5
Figure 5.1 The Most Preferred Political Outcome
of A Voter

Tax per Unit

Z of Output
ti
Tax

MBi

0 Q*
Output per Year
6
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.

7
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

8
 Figure 5.2 Political Equilibrium Under Majority
Rule With Equal Tax Shares
Marginal Benefit,Cost,

E MC = AC
350
and Tax (Dollars)

Σ MB

t
50 MBG
MBA MBB MBC MBM MBF MBH

0 1 2 3 4 5 6 7
Security Guards per Week 9
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.

10
 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

11
Implications of Median Voter
Model
 Only the median voter gets his most-
preferred outcome.
 Others get either too little or too much.

12
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.

13
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.

14
Uniqueness and Cycling of
Outcomes Under Majority
Rule
Voter Rankings For Fireworks Displays per Year
Voter First Choice Second Choice Third Choice

A 3 2 1

B 1 3 2

C 2 1 3

15
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.

16
 Figure 5.3 Voter Rankings of Alternatives

Net Benefit for A

Net Benefit for A
Multiple Peaks
Single Peak

0 1 2 3 0 1 2 3
Fireworks Displays per Year

Net Benefit for A

Net Benefit for A

Single Peak
Single Peak

0 1 2 3 0 1 2 3
Fireworks Displays per Year
17
 Election 1: How Many Fireworks
Displays per Year,
1 vs 2
 B votes for 1
 A and C vote for 2

 Result 2 wins

18
 Election 2: How Many
Fireworks Displays per Year,
3 vs 1
 A votes for 3
 B and C vote for 1

 Result 1 wins

19
 Election 3: How Many Fireworks
Displays per Year,
2 vs 3
 C votes for 2
 A and B vote for 3

 Result 3 wins

20
Pairwise Cycling
 Pairwise cycling is a phenomenon in
which each outcome can win a
majority, depending on how it is paired
on a ballot.

21
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.

22
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.
23
 Cause of Cycling:
Multi-peaked preferences
Voter Rankings For Fireworks Displays per Year: All
Voters with Single Peaked Preferences
Voter First Second Third
Choice Choice Choice

A 3 2 1

B 1 2 3

C 2 1 3

24
 Election 1: How Many Fireworks
Displays per Year,
1 vs 2
 B votes for 1
 A and C vote for 2

 Result 2 wins

25
Election 2: How Many Fireworks
Displays per Year,
3 vs 1
 A votes for 3
 B and C vote for 1

 Result 1 wins

26
 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

27
 Figure 5.4 The Median Peak as the Political
Equilibrium under Majority Rule

Medium Peak
Peak for (Voter C)
Net Benefit

Voter B'
Peak for Voter A

0 1 2 3
Fireworks Displays per Year 28
Figure 5.5 Declining Marginal Benefit of a Pure Public
Good, Meaning That Preferences are Single Peaked
Net Benefit
Marginal Benefit
and Tax per Unit

t
MB
0 Q*
Output of a Pure Public Good 29
Political Processes
 Constitutions
 Minority Rule
 Majority Rule

30
Costs and Benefits of Collective Action

 Benefit: decrease in political

externalities

 Cost: increase in political

transaction costs

31
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

32
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.

33
 Figure 5.6 The Median Voter And Political Platforms
Net Benefit

Net Benefit for the Median Voter

0 Q*
Output of Government Goods and Services per Year
34
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.

35
 Figure 5.7 Number of Voters and Government Output
Number of Voters

0 Q*
Output of Government Goods and Services per Year

36
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.

37
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.
38
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.
39
 Figure 5.8 Logrolling

Cost, and Tax (Dollars)

Cost, and Tax (Dollars)
A B

Marginal Benefit,
Marginal Benefit,

300 MC 300 MC
250 250
MBA
MBC
100 t 100 t
MBB MBC

MBA 0 1 MBB 0 1
Fireworks Displays per Week
Cost, and Tax (Dollars)
Marginal Benefit,

MC = MSC
600
500
C Σ MB
250
200 t
MBB MBA MBC
0 1
Security Guards and Fireworks Displays per Week 40
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

41
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.

42
 Figure 5.9 Bureaucracy and Efficiency
A

Cost (Dollars)
A
Benefit and MSC

MSB B
Q*
Output per Year
B TSC
TSB'
Cost (Dollars)
Benefit and

TSB

0 Q* QB Q’B
Output per Year 43