Public Choice Theory Microeconomics Dr. D. Foster ?

Political Choices... Economic Reasoning should Not how the system should work... does How the system does work. Are politicians/bureaucrats/employees … -- rational ? -- self-interested ? -- like the rest of us ?

Two Basic Decisions: How much to tax? How much to spend? Vote for a new defense system? Vote for a new social program? What is the downside ? What is the downside ? President Haeger Does President Haeger want more $ for NAU? Paul Gosar Does Paul Gosar want more $ for USGS? Is there any incentive to keep costs down ? Is there any incentive to keep costs down ?

Perverted Incentives No profit - no reward for efficiency. No profit - no reward for efficiency. Serving others doesn’t serve oneself. No pricing mechanism to insure that allocation is efficient. No pricing mechanism to insure that 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.

VotingIssues I Voting Issues I 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 Systems Voting Systems What’s so great about majority rule? What’s so great about majority rule? -- It is just like football !! proportional The market results in proportional “rule.” inconsistent. Public choices may be inconsistent. inefficient. Public choices may be inefficient. Point voting ? Continuous elections ? Non-geographic voting ?

The Median Voter Model The 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% ABA’B’A”

Inconsistent outcome: Want a park? Inconsistent outcome: 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 > B 35% favor B > A > C 25% favor C > B > A How do you frame a vote between just two ?

Inefficient outcome: Build a road? Inefficient outcome: Build a road? $ 200 $ 90 $ 80 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 George – $ 90 Janet – $ 80 Will they vote to raise taxes to pay ? What can we do to alter the outcome ?

Why is inefficiency a rational outcome? Why is inefficiency a rational outcome? Voters Voters – information is costly (rational ignorance) -- Does your vote count ? -- Can you trust political ads ? Special interests Special interests -- Spread costs; concentrate benefits. -- How about a Help-Dr.-Foster tax ? It’s a dime. Bureaucrats Bureaucrats -- What are their incentives ? -- Whom do they serve ?

The 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 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.

warming What about global warming? 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 ?