1. Copyright © 2002 Thomson Learning, Inc.
Chapter 5
Public Choice and the Political Process
Copyright © 2002 Thomson Learning, Inc.
Thomson Learning™ is a trademark used herein under license.
ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom use or in a secure electronic network environment that prevents downloading or reproducing the copyrighted material. Otherwise, no part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including, but not limited to, photocopying, recording, taping, Web distribution, information networks, or information storage and retrieval systems—without the written permission of the publisher.
Printed in the United States of America
ISBN X

2. Intro Public expenditures and taxes affect daily life Democracy
Theory of Public choice studies how decisions to allocate resources and redistribute income are made through a nation’s political system.

3. Plan Offre de biens collectifs Modèle d’équilibre (règle de majorité)
Equilibres uniques et cycliques
Processus politique
Parties politiques
Groupes d’intérêt
Bureaucratie

4. I – Offre de biens collectifs

5. 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.
Public choice vs. private choice

6. 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.

7. 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

8. Information on costs difficult to obtain.
Proposals that cannot gain approval under unamimous consent might be approced under majority rule

9. 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.

10. Figure 5.1 The Most Preferred Political Outcome of A Voter
Tax per Unit
of Output Z ti
Tax MB i Q *
Output per Year

11. The Choice to Vote or Not
Decision to vote depends on benefits, costs and the probability that voting will achieve the anticipated benefits.
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.

12. 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

13. II – Équilibre politique (règle de majorité)

14. Security Guards per Week
Figure 5.2 Political Equilibrium Under Majority Rule With Equal Tax Shares
SMB E
MC = AC
350
Marginal Benefit,Cost,
and Tax (Dollars)
MBM
MBF
MBG
MBH
MBC t 50
MBB
MBA 1 2 3 4 5 6 7
Security Guards per Week

15. Increase Security Guards per Week to:
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 B C M F G H
Result
Pass
Fail

16. 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.

17. Implications of Median Voter Model
Only the median voter gets his most-preferred outcome (not 51% of voters).
Others get too little or too much.
The greater the dispersion, the greater the dissatisfaction
The more voters’ preferences are clustered, the greater the satisfaction

18. 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.
Equal to zero if tax shares are adjusted to marginal benefits
Political externalities don’t exist under unanimous consent.
More inclusive majorities protect minorities

19. 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.
Citizens must weigh political externalities and political transaction costs
Representative government economize on political transaction costs

20. III - Equilibres uniques et cycliques

21. Uniqueness and Cycling
A unique political equilibrium may not emerge under majority rule
The outcome can depend on the order in which alternatives are presented

22. 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 C

23. 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.

24. Figure 5.3 Voter Rankings of Alternatives
Multiple Peaks
Single Peak
Net Benefit for A
Net Benefit for B 1 2 3 1 2 3
Fireworks Displays per Year
Single Peak
Net Benefit for C 1 2 3
Fireworks Displays per Year

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

26. Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B C
Election 1
1 display per year
2 displays per year A X B C
Totals
1 vote
2 votes
Result : 2 displays per year wins

27. Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B C
Election 2
2 displays per year
1 display per year A X B C
Totals
1 vote
2 votes
Result :1 display per year wins

28. Pairwise Cycling A 3 2 1 B C A X B C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B C
Election 3
2 displays per year
3 displays per year A X B C
Totals
1 vote
2 votes
Result : 3 displays per year wins

29. 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.

30. 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 must not be 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.

31. Cause of Cycling: Multi-peaked preferences
Voter Rankings For Fireworks Displays per Year: All Voters with Single Peaked Preferences
Voter
First Choice
Second Choice
Third
Choice A 3 2 1 B C

32. Figure 5.3 Voter Rankings of Alternatives
Single Peak
Net Benefit for A 1 2 3
Fireworks Displays per Year
Single Peak
Single Peak
Net Benefit for B’
Net Benefit for C 1 2 3 1 2 3
Fireworks Displays per Year

33. Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B’ C
Election 1
1 display per year
2 displays per year A X B’ C
Totals
1 vote
2 votes
Result : 2 displays per year wins

34. Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B’ C
Election 2
3 displays per year
1 display per year A X B’ C
Totals
1 vote
2 votes
Result :1 display per year wins

35. Pairwise Cycling A 3 2 1 B’ C A X B’ C Totals 1 vote 2 votes
Voter
First Choice
Second Choice
Third Choice A 3 2 1 B’ C
Election 3
2 displays per year
3 displays per year A X B’ C
Totals
1 vote
2 votes
Result : 2 displays per year wins

36. Fireworks Displays per Year
Figure 5.4 The Median Peak as the Political Equilibrium under Majority Rule
Medium Peak
(Voter C )
Peak for
Voter B'
Peak for Voter A
Net Benefit 1 2 3
Fireworks Displays per Year

37. Marginal Benefit and Tax per Unit
Figure 5.5 Declining Marginal Benefit of a Pure Public Good Meaning That Preferences are Single Peaked Q *
Net Benefit MB
Marginal Benefit
and Tax per Unit t
Output of a Pure Public Good

38. IV – Processus politique

39. Political Processes
Constitutions
Minority Rule
Majority Rule

40. Costs and Benefits of Collective Action
Benefit: decrease in political externalities
Cost: increase in political transactions cost

41. 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

42. Figure 5.6 The Median Voter And Political Platforms
Net Benefit
Net Benefit for the Median Voter Q *
Output of Government Goods and Services per Year

43. 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

44. Figure 5.7 Number of Voters and Government Output
Output of Government Goods and Services per Year Q *

45. 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.

46. Figure 5.8 Logrolling A B 300 MCB 300 MC Cost, and Tax (Dollars)
Marginal Benefit,
250
MBB
Cost, and Tax (Dollars)
Marginal Benefit,
250
MBA
100 t
100 t
MBB
MBA
MBB
MBC 1 1
Fireworks Displays per Week
MC = MSC
600
SMB
500
Cost, and Tax (Dollars)
Marginal Benefit, C
MBC
MBA
MBB
250 t
200 1
Security Guards and Fireworks Displays per Week

47. 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

48. 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.

49. Figure 5.9 Bureaucracy and Efficiency
MSC
MSB
Cost (Dollars)
Benefit and E B Q *
Output per Year
TSC B
TSB'
TSB
Cost (Dollars)
Benefit and Q * QB Q’ B
Output per Year