Public Choice Theory

Microeconomics

Dr. D. Foster

Political Choices . . . Political Choices . . . Economic ReasoningEconomic Reasoning

Not how the system shouldshould work . . . How the system doesdoes work.

Are politicians/bureaucrats/employees …-- rational ?-- self-interested ?-- like the rest of us ?

Two Basic Decisions: Two Basic Decisions: How much to tax? How much to tax? How much to spend?How much to spend?

Vote for a new defense system? Vote for a new social program?

What is the downside ?What is the downside ?

Does President Haeger President Haeger want more $ for NAU? Does Paul Gosar Paul Gosar want more $ for USGS?

Is there any incentive to keep costs down ?Is there any incentive to keep costs down ?

Perverted IncentivesPerverted Incentives

No profit - no reward for efficiency.No profit - no reward for efficiency. Serving others doesn’t serve oneself.

No pricing mechanism to insure thatNo pricing mechanism to insure thatallocation is efficient.allocation is efficient. At Q*, marginal value (P) = marginal cost

Criteria for “success” is majority.Criteria for “success” is majority. vs. lower bar of profitability.

supersedes intensity.

Choices in the public sector are enforceable.Choices in the public sector are enforceable.

VotingVoting IssuesIssues

Not especially rewarding. Should it be easy? Should it require a test?

Information is costly. If your contribution is zero . . .

We can’t pick results only promises. And, in a market . . . ? What if the Academy Awards . . . ?

Benefits and costs are usually mismatched. e.g., Flagstaff mayor’s race; CCC bond

proposition.Paradox of collective choice.

Voting SystemsVoting Systems

What’s so great about majority rule?What’s so great about majority rule?-- It is just like football !!

The market results in proportionalproportional “rule.”

Public choices may be inconsistent.inconsistent. Public choices may be inefficient.inefficient.

Point voting ? Continuous elections ? Non-geographic voting ?

The Median Voter ModelThe Median Voter Model

If preferences are peaked . . . If we vote for the person closest to us . . .

Candidates should congregate near the middle!

Candidate A wins !!

median voter

50%50%

A BA’ B’A”

Inconsistent outcome: Inconsistent outcome: Want a park?Want a park?

City council has 3 choices for land parcel:A – Turn it into a park.B – Use it for low-income housing.C – Allow for commercial development.

Polling indicates that:40% favor A > C > B35% favor B > A > C25% favor C > B > A

How do you frame a vote between just two ?How do you frame a vote between just two ?

Inefficient outcome: Inefficient outcome: Build a road?Build a road?

A road can be built that benefits 3 people. The cost is $300, and each would pay an equal share. They benefit as follows: John – $ 200$ 200 George – $ 90$ 90 Janet – $ 80$ 80

Will they vote to raise taxes to pay ?Will they vote to raise taxes to pay ?

What can we do to alter the outcome ?What can we do to alter the outcome ?

Why is inefficiency a rational outcome?Why is inefficiency a rational outcome?

VotersVoters – information is costly (rational ignorance) -- Does your vote count ? -- Can you trust political ads ?

Special interestsSpecial interests -- Spread costs; concentrate benefits. -- How about a Help-Dr.-Foster tax ? It’s a dime.

BureaucratsBureaucrats -- What are their incentives ? -- Whom do they serve ?

The Virtues of the MarketThe Virtues of the Market

• Trial and error achieves rational outcome.

• Even imperfect markets are remarkably efficient.

• Markets penalize incompetence & miscalculation.

• Markets reward ability & foresight.

• Markets encourage innovation. Can the government plan the “discovery” process?

What Government can’t What Government can’t do:do: • Use “technical expertise” to guide

economy.

• Achieve “perfect market” outcomes.

• Guarantee good results even with good intentions.

• Ignore incentives and compatible processes.

• Be benign nor efficient.

What about global warmingwarming?

What are we talking about? What is the basis for the alarm? Do the alarmists have a good track record? Are the alarmists scientists with appropriate

expertise? Do others, with similar expertise, disagree?

Public Choice Theory

Microeconomics

Dr. D. Foster