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Public Finance (MPA405) Dr. Khurrum S. Mughal. Lecture 9: Public Choice and the Political Process Public Finance.

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Presentation on theme: "Public Finance (MPA405) Dr. Khurrum S. Mughal. Lecture 9: Public Choice and the Political Process Public Finance."— Presentation transcript:

1 Public Finance (MPA405) Dr. Khurrum S. Mughal

2 Lecture 9: Public Choice and the Political Process Public Finance

3 Public Choice –Public Choice is when decisions are made through political interaction of many persons according to pre- established rules. –Public choice vs. private choice Taxes 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.

5 III - Unique and cyclical equilibria

6 Uniqueness and Cycling A unique political equilibrium may not emerge under majority rule –Two or more public good outputs may recieve majority vote The outcome can depend on factors other than cost vs benefits –order in which alternatives are presented –Inclusion or exclusion of alternatives –Disturbing possibility

7 Uniqueness and Cycling of Outcomes Under Majority Rule Voter First ChoiceSecond ChoiceThird Choice A321 B132 C213 Voter Rankings For Fireworks Displays per Year

8 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.

9 Figure 5.3 Voter Rankings of Alternatives Net Benefit for A Single Peak 0 Fireworks Displays per Year Net Benefit for B Multiple Peaks 0 Net Benefit for C Single Peak 0 Fireworks Displays per Year

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

11 Pairwise Cycling Voter First ChoiceSecond ChoiceThird Choice A321 B132 C213 Election 11 display per year2 displays per year AX BX CX Totals1 vote2 votes Result : 2 displays per year wins

12 Pairwise Cycling Voter First ChoiceSecond ChoiceThird Choice A321 B132 C213 Election 23 displays per year1 display per year AX BX CX Totals1 vote2 votes Result :1 display per year wins

13 Pairwise Cycling Voter First ChoiceSecond ChoiceThird Choice A321 B132 C213 Election 32 displays per year3 displays per year AX BX CX Totals1 vote2 votes Result : 3 displays per year wins

14 Implications Arbitrary results Results are order dependent – any can emerge winner – phenomena of Cycling Disturbing: –No rhyme or reason explains the emerging choices Public Choices can be influenced by –Order in which issues are placed on the agenda –Elimination 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 criteria criteria 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 obtained –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 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 Preferences VoterFirst Choice Second Choice Third Choice A321 B123 C213

18 Figure 5.3 Voter Rankings of Alternatives Net Benefit for A Single Peak 0 Fireworks Displays per Year Net Benefit for B’ Single Peak 0 Net Benefit for C Single Peak 0 Fireworks Displays per Year

19 Pairwise Cycling Voter First ChoiceSecond ChoiceThird Choice A321 B’123 C213 Election 11 display per year2 displays per year AX B’X CX Totals1 vote2 votes Result : 2 displays per year wins

20 Pairwise Cycling Voter First ChoiceSecond ChoiceThird Choice A321 B’123 C213 Election 23 displays per year1 display per year AX B’X CX Totals1 vote2 votes Result :1 display per year wins

21 Pairwise Cycling Voter First ChoiceSecond ChoiceThird Choice A321 B’123 C213 Election 32 displays per year3 displays per year AX B’X CX Totals1 vote2 votes Result : 2 displays per year wins

22 The Median Peak as the Political Equilibrium under Majority Rule Net Benefit Medium Peak (VoterC) Fireworks Displays per Year 0 Peak for Voter A Peak for Voter B' 123

23 Existence of Multiple-Peaked preferences Multiple Peaked Preferences are inconsistent with declining Marginal Benefit

24 Declining Marginal Benefit of a Pure Public Good Meaning That Preferences are Single Peaked 0 MB t Marginal Benefit and Tax per Unit Net Benefit Q * Output of a Pure Public Good

25 Existence of Multiple-Peaked preferences Multiple Peaked Preferences are inconsistent with declining Marginal Benefit Can exist in real life: –Example: Public vs Private schooling Budgets Vietnam War

26 IV – Political Process

27 Political Processes Constitutions Minority Rule Majority Rule

28 Political Processes Constitutions –Accepted set of rules by which decisions are made –Evolve over time –Are generally accepted – Some decisions require rules some doesn’t Choice of apparel vs choice of war – Viable constitutions have social contracts inherent in their rules Uncertainty of skills and future opportunities

29 Political Processes Minority Rule –Might not satisfy majority of community –Political externalities imposed by minority of citizens –Decisions by minority – oligarchy –One single individual – dictatorship (monarchy) –No population involvement – colonial rule

30 Political Processes Majority Rule – Simple majority rule 51% – 2/3,majority rule Number of dissatisfied voters declines to 33%


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