Public Finance (MPA405) Dr. Khurrum S. Mughal

Lecture 11: Public Choice and the Political Process Public Finance

Public Choice –Public Choice is when decisions are made through political interaction of many persons according to pre- established rules. –Public choice vs. private choice Taxes Vs Voluntary Cost-Sharing

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.

Effect of Nonvoting on Political Equilibrium Political Platform Targets Median most preferred outcome of all voters Assuming a linear scale of Liberalness Voters might abstain because –Indifferent among the political platforms as many citizens of both parties do not vote –Alienation Voters might not vote if too far from preferred positions The political outcome tends to shift towards mode rather than median of most preferred outcome Normal distribution has median equaling mode Asymmetric or multimodal distribution

Logrolling or vote trading More than one issue to be voted on as a package when intensities of preference differs across issues, might result into trading of votes, called Logrolling – Oil Producers vs Shoe Manufacturers Requirement: Asymmetry of gains

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.

Logrolling or vote trading Implicit Logrolling: pairing two or more issues of strong interest to divergent issues – Textile import quotas vs new bomber Logrolling as Safety Valve: – Opportunities to express intensity of preferences – Can be used to gain benefits May cause losses in efficiency depicted by next example

Logrolling A MB B 1 t MC B C 1 t MC = MSC B 1 t MC MB A Marginal Benefit, Cost, and Tax (Dollars)  MB MB C MB A MB B MB A MB B MB C Marginal Benefit, Cost, and Tax (Dollars) Marginal Benefit, Cost, and Tax (Dollars) Fireworks Displays per Week Security Guards and Fireworks Displays per Week

Special Interests Special Interests are groups that lobby on a particular issue and put pressure on –Politicians –Bureaucrats –Voters 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.

Special Interests Can put pressure to alter the taxes and subsidies and raise well being of their members Gary S. Becker –Successful pressure groups are making the rival group worse-off –Increased influence decreases the other’s influence –Successful interest group is relatively small when compared to the population than pays taxes to finance their subsidy

Bureaucracy and the Supply of Public Output Bureaucracy for implementing the Public Choices made through public institutions Involved in delivery and production of Public goods Efficiency is difficult to measure –Output is not quantifiable –Nor easily sold for profit in market Do not own the outputs that produce

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.

Bureaucracy and the Supply of Public Output William Niskanen –Bureaucrats seek to Maximize the power Power is correlated with resources at hand Resources are correlated with the size of the budget allocated –Would either increase output ir increase the inputs

Bureaucracy and Efficiency Q* A E B A Output per Year Q’ B 0 QBQB Q* Benefit and Cost (Dollars) Output per Year B Benefit and Cost (Dollars) TSB' TSB TSC MSC MSB