Chapter 5

Public Choice and the Political

Process
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Printed in the United States of America
ISBN 0-03-033652-X
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 The Supply of Public Goods
Through Political Institutions

 Public Choice is when

decisions are made
through political interaction
of many persons according
to pre-established rules.
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 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.

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 Tax Shares
or 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.
ti = tax share to individual i
 ti = average cost of good
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 Individual's Choice
 The individual makes choices given what will
be the most preferred political outcome to
them.
 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.

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 Figure 5.1 The Most Preferred Political Outcome of
A Voter

Tax per Unit

Z of Output
ti
Tax

MBi

0 Q*
Output per Year
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 The Choice to Vote or Not
 Rational Ignorance is 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 not to gather the
information and not to vote.

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 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

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 Figure 5.2 Political Equilibrium Under Majority Rule
With Equal Tax Shares
Marginal Benefit,Cost,

E MC = AC
350
and Tax (Dollars)

MB

t
50 MBG
MBA MBB MBC MBM MBF MBH

0 1 2 3 4 5 6 7
Security Guards per Week
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 Median Voter Model
 The median voter model assumes 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.

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 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

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

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 Political Externalities
 Political Externalities are the losses in
well-being that occur when voters do
not obtain their most-preferred
outcomes given their tax shares.

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 Political Transactions Costs
 Political Transactions Costs are the
measure of the value of time, effort, or
other resources expended to reach or
enforce a collective agreement.

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 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 1 3 2

C 2 1 3

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 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.
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 Figure 5.3 Voter Rankings of Alternatives

Net Benefit for A

Net Benefit for A
Multiple Peaks
Single Peak

0 1 2 3 0 1 2 3
Fireworks Displays per Year

Net Benefit for A

Net Benefit for A

Single Peak
Single Peak

0 1 2 3 0 1 2 3
Fireworks Displays per Year
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 Election 1: How Many
Fireworks Displays per Year, 1
vs 2
 B votes for 1
 A and C vote for 2

 Result 2 wins

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 Election 2: How Many Fireworks
Displays per Year, 3 vs 1
 A votes for 3
 B and C vote for 1

 Result 1 wins

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 Election 3: How Many Fireworks
Displays per Year, 2 vs 3
 C votes for 2
 A and B vote for 3

 Result 3 wins

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

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 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.

Copyright © 2002 by Thomson Learning, Inc.

 Conditions of Arrows
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 an alternative to the
ballot.
 Public choice should be transitive.
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 Cause of Cycling: Multi-peaked
preferences
Voter Rankings For Fireworks Displays per Year: All Voters
with Single Peaked Preferences

Voter First Second Third

Choice Choice Choice

A 3 2 1

B 1 2 3

C 2 1 3

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 Election 1: How Many
Fireworks Displays per Year, 1
vs 2
 B votes for 1
 A and C vote for 2

 Result 2 wins

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 Election 2: How Many
Fireworks Displays per
Year, 3 vs 1
 A votes for 3
 B and C vote for 1

 Result 1 wins

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 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

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 Figure 5.4 The Median Peak as the Political
Equilibrium under Majority Rule

Medium Peak
Peak for (Voter C)
Net Benefit

Voter B'
Peak for Voter A

0 1 2 3
Fireworks Displays per Year
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 Figure 5.5 Declining Marginal Benefit of a Pure Public
Good Meaning That Preferences are Single Peaked
Net Benefit
Marginal Benefit
and Tax per Unit

t
MB
0 Q*
Output of a Pure Public Good
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 Political Processes
 Constitutions
 Minority Rule
 Majority Rule

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 Costs and Benefits of
Collective Action
 Benefit: decrease in political
externalities

 Cost: increase in political

transactions cost

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 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

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 Net Benefit Figure 5.6 The Median Voter And Political Platforms

Net Benefit for the Median Voter

0 Q*
Output of Government Goods and Services per Year
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 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

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 Figure 5.7 Number of Voters and Government
Output
Number of Voters

0 Q*
Output of Government Goods and Services per Year

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 Logrolling
or vote trading
 Logrolling is 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 the other issue.

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 Figure 5.8 Logrolling

Cost, and Tax (Dollars)

Cost, and Tax (Dollars)
A B

Marginal Benefit,
Marginal Benefit,

300 MCB 300 MC

250 250
MBA
MBB
100 t 100 t
MBB MBC

MBA 0 1 MBB 0 1
Fireworks Displays per Week
Cost, and Tax (Dollars)
Marginal Benefit,

MC = MSC
600
500
C MB
250
200 t
MBB MBA MBC
0 1
Security Guards and Fireworks Displays per Week
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 Special Interests
 Special Interests are groups that lobby on a
particular issue.
 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

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 Bureaucracy and the Supply of
Public Output
 Officials measure their power in terms
of the size of their budget, not the
efficiency of the outcome they generate.
This causes bureaucrats to have a self-
interest in inefficiently high levels of
government spending.

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 Figure 5.9 Bureaucracy and Efficiency
A

Cost (Dollars)
A
Benefit and MSC

MSB B
Q*
Output per Year
B TSC
TSB'
Cost (Dollars)
Benefit and

TSB

0 Q* QB Q’B
Output per Year
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