Chapter05 - Public Choice and The Political Process

Chapter 7
Public Choice and the Political

Process
Copyright © 2002 Thomson Learning, Inc.
Thomson Learning™ is a trademark used herein under license.
ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY
TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom
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of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical,
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Printed in the United States of America
ISBN 0-03-033652-X
Copyright © 2002 by Thomson Learning, Inc.
The Supply of Public Goods
Through Political Institutions
 Public Choice is when

decisions are made
through political interaction
of many persons according
to pre-established rules.
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.

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
Individual's Choice
 The individual makes choices given what will
be the most preferred political outcome to
them.
 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.

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
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 not to gather the
information and not to vote.

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

Figure 5.2 Political Equilibrium Under Majority Rule
With Equal Tax Shares
Marginal Benefit,Cost,
E MC = AC
350
and Tax (Dollars)
MB
t
50 MBG
MBA MBB MBC MBM MBF MBH
0 1 2 3 4 5 6 7
Security Guards per Week
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.

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

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

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.

Political Transactions Costs
 Political Transactions Costs are the
measure of the value of time, effort, or
other resources expended to reach or
enforce a collective agreement.

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

Preferences
 Single-peaked preferences
 a unique optimal outcome exists

 Multi-peaked preferences
 as a person moves away from their
most preferred outcome they become
worse off until a certain point when
moving further away from their most-
preferred outcome makes them better
off.
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
Election 1: How Many
Fireworks Displays per Year, 1
vs 2
 B votes for 1
 A and C vote for 2
 Result 2 wins

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

 C votes for 2
 A and B vote for 3
 Result 3 wins

Pairwise Cycling
 Pairwise cycling is the phenomenon in
which each outcome can win a majority
depending on how it is paired for voting.

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.

Conditions of Arrows
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 an alternative to the
ballot.
 Public choice should be transitive.
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

Fireworks Displays per Year, 1
vs 2
 B votes for 1
 A and C vote for 2
 Result 2 wins

Fireworks Displays per
Year, 3 vs 1
 A votes for 3
 Result 1 wins

 A votes for 3
 Result 2 wins
 Net Result: if “2” is on the ballot, it wins

Thank You

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Chapter 7

Public Choice and the Political

 Public Choice is when

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Copyright © 2002 by Thomson Learning, Inc.

Tax per Unit

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Result Pass Pass Pass Pass Fail Fail Fail

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Net Benefit for A

Net Benefit for A

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Voter First Second Third

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 Net Result: if “2” is on the ballot, it wins

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Copyright © 2002 by Thomson Learning, Inc.

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