Lecture Public economics (5th edition) - Chapter 6: Public choice theory

Lecture Public economics (5th edition) - Chapter 6 discuss the Rawlsian theory of justice and comment on its relevance to recent political developments in South Africa, explain the median voter theory and indicate its potential strengths and weaknesses, discuss the meaning and importance of Kenneth Arrow’s impossibility theorem, consider whether logrolling (or vote trading) is an efficient means of improving the outcomes of a majority voting system.

• Discuss the Rawlsian theory of justice and comment on its

relevance to recent political developments in South Africa

• Explain the median voter theory and indicate its potential

strengths and weaknesses

• Discuss the meaning and importance of Kenneth Arrow’s

impossibility theorem

• Consider whether logrolling (or vote trading) is an efficient

means of improving the outcomes of a majority voting system

• Explain the theory of ‘optimal voting rules’ and consider the

question of whether it does indeed provide an ‘optimal rule’ for majority voting

• Discuss the maximising behaviour of politicians and

bureaucrats, and consider the implications of such behaviour for majority voting

• Explain the origins and consequences of ‘rent-seeking’

• Pareto-optimal outcome – collective decisions in the

interests of all parties

• Positive sum game.

The unanimity-voting rule means that each member or representative group within a community must support a proposal before it becomes the

collective decision.

• Normative

• Free and rational persons choose principles of justice

• Social contract

• Justice in fairness

• Veil of ignorance

• Equals on the same playing field

•

• Rawlsian welfare function.

• Time to reach unanimous decision

• Divergent nature of individual preferences

• Issues

• Cost of unanimity?

• Bargaining

• Minority right to veto.

• Majority rule/majority voting

• Direct democratic dispensation

• Representative democracy

– Reaching majority approval takes much less time and thus less costly

– Less likely that minority will prevent majority

The median voter theorem:

Under a majority voting system in which preferences are not extreme, it is the median voter’s preferred option that will win the day, since that is the option that will produce a minimum welfare loss for the whole group.

Ethical conditions

• Rationality assumption

and:

• Independence of irrelevant alternatives

• Pareto principle

• Unrestricted domain

• Non-dictatorship.

• Intensity of preferences cannot be accounted for

• Accommodation of preference intensities:

– Vote in the form of “intensity units”

• Normative

• Difficult to implement

• Administratively costly

– Logrolling or vote trading

• Can either increase or decrease ability of a majority voting system to truly reflect the wishes of the majority.

Voter Amount (R million)

Two kinds of costs:

• External

• Decision making.

The ‘optimal’ voting majority varies in accordance with the particular public issue in question and that these optimal majorities depend on the

costs involved in the act of voting.

• Success of intervention requires an adequate and

efficient institutional framework

– Legislative authority (such as parliament)

– Law enforcement

– The Judiciary

– Tax collection or revenue services

– Regulatory bodies

• Value system and behavioural norms should

entrench high levels of trust between:

– Consumers

– Producers

– Government institutions

• Characteristics

– Voters are rationally ignorant of much of what politicians stand for

– Politicians are elected on the basis of a package of policies

• Implicit logrolling.

Policy Strongly favoured by Weakly opposed by

Relocation of

Parliament Civil servants (33.3%) Rest of electorate (66.7%)

Rugby development Rugby lovers (33.3%) Rest of electorate (66.7%)

Student loan scheme Students (33.3%) Rest of electorate (66.7%)

• Do not maximise profit

• Do not face market tests

• Principal-agent problem.

Individuals in the bureaucracy, like the rest of us, do react to different incentive schemes; they do have various preferences, and have the capacity, will and desire to fulfil these preferences They prefer more rather than less income, power, prestige, pleasant surroundings, and

congenial employees.

Thomas Borcherding (1977)