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Chapter 6
Public Choice Theory
Learning outcomes
• Discuss the Rawlsian theory of justice and comment on its relevance to recent political developments in South Africa
• Explain the median voter theory and indicate its potential strengths and weaknesses
• Discuss the meaning and importance of Kenneth Arrow’s impossibility theorem
• Consider whether logrolling (or vote trading) is an efficient means of improving the outcomes of a majority voting system
• Explain the theory of ‘optimal voting rules’ and consider the question of whether it does indeed provide an ‘optimal rule’ for majority voting
• Discuss the maximising behaviour of politicians and bureaucrats, and consider the implications of such behaviour for majority voting
• Explain the origins and consequences of ‘rent-seeking’.
The unanimity rule
• Pareto-optimal outcome – collective decisions in the interests of all parties
• Positive sum game.
The unanimity-voting rule means that each member or representative group within a community must support a proposal before it becomes the
collective decision.
The Rawlsian experiment
• Normative• Free and rational persons choose principles of justice• Social contract• Justice in fairness• Veil of ignorance• Equals on the same playing field• W = Minimum(Ua, Ub)• Rawlsian welfare function.
Shortcomings of the Rawlsian experiment• Time to reach unanimous decision• Divergent nature of individual preferences• Issues• Cost of unanimity?• Bargaining• Minority right to veto.
Majority voting and the median voter
• Majority rule/majority voting• Direct democratic dispensation• Representative democracy• Advantages
– Reaching majority approval takes much less time and thus less costly
– Less likely that minority will prevent majority.
The median voter theorem: Under a majority voting system in which preferences are not extreme, it is the median voter’s preferred option that will win the day, since that is the
option that will produce a minimum welfare loss for the whole group.
The impossibility theorem
Ethical conditions• Rationality assumption
X > Y or Y > X or X = Yand:If X > Y and Y > Z, then X > Z
• Independence of irrelevant alternatives• Pareto principle
If (X > Y)z and (X = Y)b then X > Y
• Unrestricted domain• Non-dictatorship.
Majority voting and preference intensities• Intensity of preferences cannot be accounted for• Accommodation of preference intensities:
– Vote in the form of “intensity units”• Normative• Difficult to implement• Administratively costly
– Logrolling or vote trading• Can either increase or decrease ability of a majority voting
system to truly reflect the wishes of the majority.
Voter preference for size of health budget
Voter Amount (R million)
Ndlovo 50
Mary 200
Thandi 400
Johan 600
Ibrahim 800
Optimal voting rules
Two kinds of costs:• External• Decision making.
The ‘optimal’ voting majority varies in accordance with the particular public issue in question and that these optimal majorities depend on the
costs involved in the act of voting.
The cost of democratic decision-making
Government failure
• Success of intervention requires an adequate and efficient institutional framework– Legislative authority (such as parliament)– Law enforcement– The Judiciary– Tax collection or revenue services– Regulatory bodies
• Value system and behavioural norms should entrench high levels of trust between:– Consumers– Producers– Government institutions.
Politicians
• Characteristics– Voters are rationally ignorant of much of what politicians
stand for– Politicians are elected on the basis of a package of policies
• Implicit logrolling.
Coalition-forming and implicit logrollingPolicy Strongly favoured by Weakly opposed by
Relocation of Parliament
Civil servants (33.3%) Rest of electorate (66.7%)
Rugby development Rugby lovers (33.3%) Rest of electorate (66.7%)
Student loan scheme Students (33.3%) Rest of electorate (66.7%)
Bureaucratic failure
• Do not maximise profit• Do not face market tests• Principal-agent problem.
Individuals in the bureaucracy, like the rest of us, do react to different incentive schemes; they do have various preferences, and have the
capacity, will and desire to fulfil these preferences. They prefer more rather than less income, power, prestige, pleasant surroundings, and
congenial employees.
Thomas Borcherding (1977)
Bureaucratic failure
Rent-seeking and corruption
Thank you.