1. 8 CHAPTER Public Sector Demand PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe

2. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-2 The Median Voter Model  Concludes that a majority rule voting system will select the outcome preferred by the median voter  Important assumptions:  Voters can rank alternatives along a one- dimensional continuum  Voters have single-peaked preferences

3. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-3 The Median Voter Model: Committee & Referendum

4. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-4 The Median Voter in a Representative Democracy  Voters generally do not directly vote on issues in a representative democracy  Voters choose the representative that has views that are closest to their own

5. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-5 The Median Voter in a Representative Democracy  Two representative model  Winning candidate needs to get the median voter to win  Political competition results in both representatives targeting the median voter

6. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-6 The Median Voter in a Representative Democracy

7. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-7 The Decisive Median Voter  As long as preference assumptions hold, model can be extended to any number of voters  Can be represented in a density function with positions from left to right  More voters near the median voter

8. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-8 The Decisive Median Voter

9. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-9 Application: Extreme Candidates Cannot Win Election

10. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-10 Application: Third Parties Cannot Persist

11. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-11 The Cyclical Majority  If preference assumptions are violated, median voter’s preferred outcome might not be selected by majority rule  Could produce a cyclical majority  No single outcome can defeat all others by majority rule

12. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-12 Violation of Single Peaked Preferences

13. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-13 Cycles and Political Institutions  If preferences are cyclical, political institutions can effect elections  Example: Ford vs. Carter  Primary produces a unique winner, even with cyclical preferences  Political institutions help produce stable outcomes

14. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-14 Information and Incentives  The political marketplace  Most voters do not have direct input  Voters are rationally ignorant  Individual vote is unlikely to affect the outcome  Voters have little incentive to become informed

15. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-15 Special Interests  Special interests have an incentive to become informed because of concentrated benefits  Example: dairy farmers  Politicians have an incentive to favor special interests over the public interest

16. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-16 Information and Incentives  Special interests and rational ignorance combine against the public interest skew median voter demand  Skew median voter demand toward special interest  Tendency to support short-sighted policies

17. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-17 Public Sector Demand in Theory and the Real World  Special interests and rational ignorance lead to government failure  Government failure leads to misallocation of resources  Median voter model, like perfect competition, helps provide insight into the ideal system

18. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-18 Economic Efficiency and the Median Voter  Even if the median voter model holds, majority rule voting is not likely to allocate resources efficiently  The median voter’s equilibrium is efficient when the median voter’s share of total demand equals median voter’s share of total cost

19. PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy Randall Holcombe 8-19 Economic Efficiency and the Median Voter