Chapter 5 Decision Making in the Public Sector Chapter outline 1 ． Differences Between the Public and Private Sectors 2 ． Voting and Public Choice 3 ． Parties and Platforms 4 ． The Median Voter Model 5 ． Addressing the Problem of Government Failure

1 ． Differences Between the Public and Private Sectors There are four important differences between the private sector and the public sector that can make the public sector less efficient and less responsive than the market: ① Lack of a Residual Claimant ② Bureaucrats and Incentives Public agencies do not usually sell their product or services;their revenue stream comes from appropriations and is not tied directly to product quality,output levels,or customer satisfaction.

Public choice Niskanen assumes that self-interested behavior will take the form of seeking more power and influence,perks and compensation,and opportunities for advancement in the bureaucracy. James Buchanan assumed government is a Leviathan.

③ Citizens and Rational Ignorance Not enough information is conveyed from citizens to government ;that is,information, which is itself a public good, is underproduced. And the cost of efforts is greater than the benefits which can be received. In general, rational ignorance has been a very fruitful hypothesis in explaining some forms of government failure.

④ Collective Versus Individual Consumption The challenge is how to apportion the cost among the users. The most common solution is to charge a single price for access to the collective good, and let all those who value it at least that much have access to it. But this solution is likely to be inefficient. ⑤ Lack of Revealed Preference Citizens have an incentive to hide their true demand in order to increase their opportunity to free ride.

⑥ Measuring and Valuing Output Lack of direct payment makes it difficult to measure and value output. There are three measures of production in the public sector are used for various purposes. Inputs are used to value public sector output in the national income accounts.

Intermediate outputs measure activities, provide a quantitative measure for comparison purposes. Final outputs represent the purpose of public sector production. All of these measures are just indicators of performance. Evidence of satisfaction or dissatisfaction with public production is difficult to obtain and interpret.

2 ． Voting and Public Choice Why people vote, how people vote, how different voting schema influence outcomes. ① One Person, One Vote Each citizen is endowed with exactly the same amount of voting power. People with equal voting rights often have different intensities of preferences, but those people who feel more strongly cannot buy an extra vote to cast.

② Winner-take-all Versus Proportional Representation Whether the winner gets most of the votes or a bare 50% plus one,that candidate gets the prize and the person supported by a minority of up to 49% has no voice. But the resulting collection of elected officials may not adequately represent voter preferences. ③ Inconsistent Results and the Voting Paradox Arrow’s Impossibility Theorem The voting paradox ④ Other Voting Systems The ranked voting and the scheme.

3 ． Parties and Platforms Parties have platforms. The median voter 4 ． The Median Voter Model The median voter is the person right at the center of the distribution of preferences.

① The Distribution of Preferences If the people ’ s preference are normally distributed,as in Figures5-1 and 5-2,then most people are clustered around the middle of the distribution. The median voter is the person who lies at the peak of the distribution. The easiest way to get that support is to concentrate on that large block of voters that lie within one standard deviation of either side of the mean.

In Figure 5-1, it is easy for politicians to obtain a stable majority of support for the middle-of-the road position,because so many voters are tightly clustered around the mean.

In figure 5-2, the majority will include more voters whose preferences are somewhat farther from the mean and who will be more dissatisfied with the outcome.

② Other Distributions Figure 5-3 is a Poisson distribution. There is a tail to the right of people who strongly support spending on parks,but the strong majority is clustered closer to the origin.

Figure 5-4 is a bimodal distribution.With a bimodal distribution, it is difficult to find satisfactory compromises.

5 ． Addressing the Problem of Government Failure ① Privatization ② Devolution ③ Rules Versus Discretion ④ Citizen Decision-making

True-false questions If false, change the statement to make it true. 1.The lack of a residual claimant is one of the reasons for market failure. 2.Government bureaucrats face the same incentive structure as private firm managers because they have the same goals. 3.SAT scores and performance on the job after graduation are examples of final outputs of public education.

4.One-person, one vote is an effective way of measuring intensity of preference. 5.If voters are offered three or more choices, and each voter has one vote, the transitivity principle guarantees that one of the three alternatives will always dominate the other two.

Answers: 1. F (Change market to government.) 2. F (The incentive structure is different because the private firm’s goal is profit maximization, which is clearly measurable, while the public sector’s performance is harder to measure.) 3. T 4. F (Change one person, one vote to ranked voting or proportional representation; or simply insert not before an effective way.) 5. F (Change transitivity principle guarantees to voting paradox suggests, and insert not between will always.)