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 Rankings For Fireworks Displays per Year
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B C

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
Multiple Peaks
Single Peak
Net Benefit for A
Net Benefit for B 1 2 3 1 2 3
Fireworks Displays per Year
Single Peak
Net Benefit for C 1 2 3
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 A 3 2 1 B C A X B C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B C
Election 1
1 display per year
2 displays per year A X B C
Totals
1 vote
2 votes
Result : 2 displays per year wins

12. Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B C
Election 2
3 displays per year
1 display per year A X B C
Totals
1 vote
2 votes
Result :1 display per year wins

13. Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B C
Election 3
2 displays per year
3 displays per year A X B C
Totals
1 vote
2 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
Voter
First Choice
Second Choice
Third
Choice A 3 2 1 B C

18. Figure 5.3 Voter Rankings of Alternatives
Single Peak
Net Benefit for A 1 2 3
Fireworks Displays per Year
Single Peak
Single Peak
Net Benefit for B’
Net Benefit for C 1 2 3 1 2 3
Fireworks Displays per Year

19. Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B’ C
Election 1
1 display per year
2 displays per year A X B’ C
Totals
1 vote
2 votes
Result : 2 displays per year wins

20. Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B’ C
Election 2
3 displays per year
1 display per year A X B’ C
Totals
1 vote
2 votes
Result :1 display per year wins

21. Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B’ C
Election 3
2 displays per year
3 displays per year A X B’ C
Totals
1 vote
2 votes
Result : 2 displays per year wins

22. The Median Peak as the Political Equilibrium under Majority Rule
Medium Peak
(Voter C )
Peak for
Voter B'
Peak for Voter A
Net Benefit 1 2 3
Fireworks 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 Peaked Q *
Net Benefit MB
Marginal Benefit
and Tax per Unit t
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%
Number of dissatisfied voters declines to 33%