This is Prof Ibrahim prepared for ch05.ppt

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1. 1
Chapter 5
Public Choice and the Political
Process

2. 2
The Supply of Public Goods
Through Political Institutions
Public Choiceinvolves
decisions being made
through political interaction
of many persons according
to pre-established rules.

3. 3
Political Equilibrium
A political equilibriumis 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.

4. 4
Tax Sharesor 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.
t
i
= tax share to individual i
t
i
= average cost of good

5. 5
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.

6. 6
Figure 5.1 The Most Preferred Political Outcome
of A Voter
Tax per Unit
of Output
t
i
MB i
Q*
Z
Tax
Output per Year
0

7. 7
The Choice to Vote or Not
Rational Ignoranceis 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.

8. 8
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

9. 9
Figure 5.2 Political Equilibrium Under Majority
Rule With Equal Tax Shares
350
MC =AC
50
t
MB
E
Marginal Benefit,Cost, and Tax (Dollars)
Security Guards per Week
0 1 2 3 4 5 6 7
MB
A
MB
B
MB
C
MB
F
MB
G MB
HMB
M

10. 10
Median Voter Model
The median voter modelassumes 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.

11. 11
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

12. 12
Implications of Median Voter
Model
Only the median voter gets his most-
preferred outcome.
Others get either too little or too much.

13. 13
Political Externalities
Political Externalitiesare the losses in
well-being that occur when voters do
not obtain their most-preferred
outcomes, given their tax shares.

14. 14
Political Transactions Costs
Political Transactions Costsare the
measures of the value of time, effort, or
other resources expended to reach or
enforce a collective agreement.

15. 15
Uniqueness and Cycling of
Outcomes Under Majority Rule
Voter First ChoiceSecond Choice Third Choice
A 3 2 1
B 1 3 2
C 2 1 3
Voter Rankings For Fireworks Displays per Year

16. 16
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.

17. 17
Figure 5.3 Voter Rankings of Alternatives
Fireworks Displays per Year
Net Benefit for
A
Single Peak
0 1 2 3
Fireworks Displays per Year
Net Benefit for
A
Single Peak
0 1 2 3
Net Benefit for
A
Single Peak
0 1 2 3
Net Benefit for
A
Multiple Peaks
0 2 3 1

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

19. 19
Election 2: How Many
Fireworks Displays per Year,
3 vs 1
A votes for 3
B and C vote for 1
Result 1 wins

20. 20
Election 3: How Many Fireworks
Displays per Year,
2 vs 3
C votes for 2
A and B vote for 3
Result 3 wins

21. 21
Pairwise Cycling
Pairwise cyclingis a phenomenon in
which each outcome can win a
majority, depending on how it is paired
on a ballot.

22. 22
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.

23. 23
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.

24. 24
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 1 2 3
C 2 1 3

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

26. 26
Election 2: How Many Fireworks
Displays per Year,
3 vs 1
A votes for 3
B and C vote for 1
Result 1 wins

27. 27
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

28. 28
Figure 5.4 The Median Peak as the Political
Equilibrium under Majority Rule
Net Benefit
Medium Peak
(Voter C)
Fireworks Displays per Year
0
Peak for VoterA
Peak for
VoterB'
1 2 3

29. 29
Figure 5.5 Declining Marginal Benefit of a Pure Public
Good, Meaning That Preferences are Single Peaked
MB
t
Q* 0
Marginal Benefit and Tax per Unit
Net Benefit
Output of a Pure Public Good

30. 30
Political Processes
Constitutions
Minority Rule
Majority Rule

31. 31
Costs and Benefits of Collective Action
Benefit: decrease in political
externalities
Cost: increase in political
transaction costs

32. 32
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

33. 33
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.

34. 34
Figure 5.6 The Median Voter And Political Platforms
Net Benefit
Output of Government Goods and Services per Year
0
Net Benefit for the Median Voter
Q*

35. 35
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.

36. 36
Figure 5.7 Number of Voters and Government Output
Number of Voters
Output of Government Goods and Services per Year
0 Q*

37. 37
Logrollingor Vote Trading
Logrollingis 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.

38. 38
Implicit Logrolling
Implicit logrollingoccurs 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.

39. 39
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.

40. 40
Figure 5.8 Logrolling
250
1
100 t
300 MC
200
t
600
MC = MSC
250
1
500
250
1
100 t
300 MC
MB
0
B
Marginal Benefit,
Cost, and Tax (Dollars)
MB
CMB
A
MB
B
MB
C
MB
B
MB
A
MB
A
MB
B
MB
C
A
0
Marginal Benefit,
Cost, and Tax (Dollars)
Fireworks Displays per Week
0
C
Marginal Benefit,
Cost, and Tax (Dollars)
Security Guards and Fireworks Displays per Week

41. 41
Special Interests
Special Interestsare 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

42. 42
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.

43. 43
Figure 5.9 Bureaucracy and Efficiency
A
Output per Year
0
Benefit and
Cost (Dollars)
Output per Year
B
Benefit and
Cost (Dollars)
B
Q’
A
B
Q
B
TSB'
TSB
TSC
MSC
MSB
*
*
Q
E
Q