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 ?

Characteristics of the Public Sector Characteristics of the Public Sector enforceable Choices are enforceable. -- stop lights -- military draft -- drug laws -- eminent domain restricted Choices are restricted (“lumpy”) -- Grand Canyon: buses or train? -- Chose candidate A or B? -- Is there any difference...

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”

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 ?

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 ?

Case Study: 1986 Congressional Race District #1 – State of Hawaii Case Study: 1986 Congressional Race District #1 – State of Hawaii

Cec Heftel wants to run for Governor ! He is currently the US Rep. for District 1. Mid-summer 1986 One problem: He must resign to run ! So, he resigns

Need #1 Need #1: Fill vacancy through Jan Need #2 Need #2: Select nominees for general election. Need #3 Need #3: Elect Congressman in November. Mid-summer 1986 Primary September General November Elections Solution: Combine #1 & #2 in September.

The Players Mid-summer 1986 Primary September General November Elections Pat Saiki (R) Neil Abercrombie (D) Mufi Hanneman (D)

The Rules Anyone can vote in the primary. Mid-summer 1986 Primary September General November Elections The Twist Saiki has no discernable competition.

A graphical look at public support Mid-summer 1986 Primary September General November Elections N.A. M.H. P.S.

September Results: Pat Saiki wins Republican primary. Pat Saiki wins Republican primary. Mufi Hanneman wins Democratic primary Mufi Hanneman wins Democratic primary Mid-summer 1986 Primary September General November Elections Neil Abercrombie wins Special Election !!! Neil Abercrombie wins Special Election !!!

November Results: Mid-summer 1986 Primary September General November Elections Pat Saiki wins election !!! Pat Saiki wins election !!!

Republicans voted for Mufi in primary - the “weaker” candidate, and he wins!!! Republicans voted for Mufi in primary - the “weaker” candidate, and he wins!!! Republicans& Democrats have an incentive to vote for their favorite in the special election; Neil wins!!! Republicans & Democrats have an incentive to vote for their favorite in the special election; Neil wins!!! Abercrombie supporters voted for Saiki in general election - retribution against Mufi’s campaign. Abercrombie supporters voted for Saiki in general election - retribution against Mufi’s campaign. What happened ? What happened ?

Saiki won a second term ( ). Saiki won a second term ( ). Saiki ran for senate in lost -- was selected to run SBA by Bush I. Saiki ran for senate in lost -- was selected to run SBA by Bush I. Abercromie ran again, and won, in served until Abercromie ran again, and won, in served until Hanneman lost 1990 race for District later served on Honolulu City Council. Hanneman lost 1990 race for District later served on Honolulu City Council. Cec Heftel lost bid for governorship. Cec Heftel lost bid for governorship. Debrief Debrief

Abercromie wanted to be governor in resigned from District 1 seat in 2010! Abercromie wanted to be governor in resigned from District 1 seat in 2010! Hanneman becomes Honolulu mayor in re-elected in wants to be governor in 2010! Hanneman becomes Honolulu mayor in re-elected in wants to be governor in 2010! Abercromie wins primary and general elections. Abercromie wins primary and general elections. Djou becomes interim Rep. for District loses general election. Djou becomes interim Rep. for District loses general election. Debrief II Debrief II

Public Choice Theory Microeconomics Dr. D. Foster