2 Lecture 9: Public Choice and the Political Process Public Finance
3 Public ChoicePublic Choice is when decisions are made through political interaction of many persons according to pre-established rules.Public choice vs. private choiceTaxes Vs Voluntary Cost-Sharing
4 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.
6 Uniqueness and Cycling A unique political equilibrium may not emerge under majority ruleTwo or more public good outputs may recieve majority voteThe outcome can depend on factors other than cost vs benefitsorder in which alternatives are presentedInclusion or exclusion of alternativesDisturbing possibility
7 Uniqueness and Cycling of Outcomes Under Majority Rule Voter Rankings For Fireworks Displays per YearVoterFirst ChoiceSecond ChoiceThird ChoiceA321BC
8 Preferences Single-peaked preferences a unique optimal outcome exists Multi-peaked preferencesas 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.
9 Figure 5.3 Voter Rankings of Alternatives Multiple PeaksSingle PeakNet Benefit for ANet Benefit for B123123Fireworks Displays per YearSingle PeakNet Benefit for C123Fireworks Displays per Year
10 Pairwise CyclingPairwise cycling is the phenomenon in which each outcome can win a majority depending on how it is paired for voting.
11 Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes VoterFirst ChoiceSecond ChoiceThird ChoiceA321BCElection 11 display per year2 displays per yearAXBCTotals1 vote2 votesResult : 2 displays per year wins
12 Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes VoterFirst ChoiceSecond ChoiceThird ChoiceA321BCElection 23 displays per year1 display per yearAXBCTotals1 vote2 votesResult :1 display per year wins
13 Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes VoterFirst ChoiceSecond ChoiceThird ChoiceA321BCElection 32 displays per year3 displays per yearAXBCTotals1 vote2 votesResult : 3 displays per year wins
14 Implications Arbitrary results Results are order dependent – any can emerge winner – phenomena of CyclingDisturbing:No rhyme or reason explains the emerging choicesPublic Choices can be influenced byOrder in which issues are placed on the agendaElimination of one alternative can change the way others are ranked
15 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.when voters have three or more distinct alternatives (options), no rank order voting system can convert the ranked preferences of individuals into a community-wide (complete and transitive) ranking while also meeting a specific set of criteriacriteria are called unrestricted domain, non-dictatorship, Pareto efficiency, and independence of irrelevant alternatives
16 Conditions of Arrows Impossibility Theorem All voters have free choice; no dictator.Unique political equilibrium is obtainedWe 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 must not be 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.
17 Cause of Cycling: Multi-peaked preferences Voter Rankings For Fireworks Displays per Year: All Voters with Single Peaked PreferencesVoterFirst ChoiceSecond ChoiceThirdChoiceA321BC
18 Figure 5.3 Voter Rankings of Alternatives Single PeakNet Benefit for A123Fireworks Displays per YearSingle PeakSingle PeakNet Benefit for B’Net Benefit for C123123Fireworks Displays per Year
19 Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes VoterFirst ChoiceSecond ChoiceThird ChoiceA321B’CElection 11 display per year2 displays per yearAXB’CTotals1 vote2 votesResult : 2 displays per year wins
20 Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes VoterFirst ChoiceSecond ChoiceThird ChoiceA321B’CElection 23 displays per year1 display per yearAXB’CTotals1 vote2 votesResult :1 display per year wins
21 Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes VoterFirst ChoiceSecond ChoiceThird ChoiceA321B’CElection 32 displays per year3 displays per yearAXB’CTotals1 vote2 votesResult : 2 displays per year wins
22 The Median Peak as the Political Equilibrium under Majority Rule Medium Peak(VoterC)Peak forVoterB'Peak for VoterANet Benefit123Fireworks Displays per Year
23 Existence of Multiple-Peaked preferences Multiple Peaked Preferences are inconsistent with declining Marginal Benefit
24 Net Benefit Marginal Benefit and Tax per Unit t MB Q * Declining Marginal Benefit of a Pure Public Good Meaning That Preferences are Single PeakedQ*Net BenefitMBMarginal Benefitand Tax per UnittOutput of a Pure Public Good
25 Existence of Multiple-Peaked preferences Multiple Peaked Preferences are inconsistent with declining Marginal BenefitCan exist in real life:Example:Public vs Private schooling BudgetsVietnam War
27 Political ProcessesConstitutionsMinority RuleMajority Rule
28 Political Processes Constitutions Accepted set of rules by which decisions are madeEvolve over timeAre generally acceptedSome decisions require rules some doesn’tChoice of apparel vs choice of warViable constitutions have social contracts inherent in their rulesUncertainty of skills and future opportunities
29 Political Processes Minority Rule Might not satisfy majority of communityPolitical externalities imposed by minority of citizensDecisions by minority – oligarchyOne single individual – dictatorship (monarchy)No population involvement – colonial rule
30 Political Processes Majority Rule Simple majority rule 51% Number of dissatisfied voters declines to 33%