Chapter 4 Public Choice
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Chapter 4 Public Choice
Focus questions:
1.In what ways does collective decision-making –such as determining the level of public goods-differ from standard decision-making within a household? What is the problem of eliciting preferences? When individuals differ in what they want-say, about the level of expenditures on a public good-how are those differences resolved? What is meant by the problem of “aggregating preferences”? 2.Why may there not be a well-defined outcome when majority voting is used to resolve differences in views? Is there any voting procedure that yields a well-defined outcome, is it necessarily efficient? 3.What are alternative ways for determining the level of public good expenditures? Are there ways which ensure an efficient level of expenditures on public goods? 4.What are some of the ways in which politics affects the outcomes of public decision-making about resource allocatferences for public goods --There are three factors that determines an individual’s attitudes towards public-goods expenditure. First, some individuals may simply like public goods more than others. Second, individuals’ income differ. Third, the nature of the tax system To see these effects, consider first a situation where there are N people and each must pay the same amount, regardless of income. Under this system of uniform taxation the tax price is just 1/N and the tax payment is G/N. with proportional taxation, everyone pays the same percentage of income. The tax price can be easily calculated. If Y’ is average income, NY’ is total income; if t is the tax rate, then tNY’ is total government revenue. This must equal government expenditures: G= tNY’,thus, the tax rate is t=G/ NY’ the tax payment of an individual with income Yi is tYi=GYi/NY’
Two questions: (1)Are there voting rules that will ensure a determinate outcome for any vote? (2)Are there any circumstances under which simple majority voting will yield a determinate outcome? 7. Arrow’s impossibility theorem (1)An ideal political mechanism should have four characteristics: --transitivity --nondictatorial choice --independence of irrelevant alternatives --unrestricted domain
Assume we vote on A versus B. voters 1 and 2 vote for A, so A wins. Now we vote on A versus C. Voters 2 and 3 prefer C to A, so C wins. It appears that C should be the social choice. C wins against A, which wins against B. But let us now have a direct confrontation between C and B. Both voter 1 and voter 3 prefer B to C. This is referred to as the voting paradox, or the paradox of cyclical voting. There is no clear winner. (3) It may be very important to control the agenda, the order in which the votes occur. if individuals realize there is going to be a particular sequence of votes, they may wish to vote strategically.
If government expenditures increase by a dollar, the individual’s incremental tax is just Yi/NY’. Thus , an individual with average income faces a tax price of 1/N, an individual with above-average income faces a higher tax price, and an individual with belowaverage income faces a lower tax price. a progressive tax system is one in which tax payments increase more than proportionately with income. Accordingly, the tax price for a high income individual under a progressive tax system is typically greater than Yi/NY’. a regressive tax system is one in which tax payments increase less than proportionately. 5.The Problem of Aggregating Preferences
PUBIC MECHANISMS FOR ALLOCATING RESOURCES
1.Private mechanism for allocating resources the market economy provides a simple and effective method for determining the level of production of private goods: The price system 2.Public mechanism for allocating resources decisions about resource allocations in the public sector are made in quite a different manner. Individuals vote for elected representatives, these elected representatives in turn vote for a public budget, and the money itself is spent by a variety of administrative agencies. 3.The Problem of Preference Revelation the decision maker in private decisions knows his own preferences. The decision maker in public decisions has to ascertain the preferences of those on whose behalf he is making the decision.
6.Majority voting and the voting paradox (1)What is the majority voting A majority voting equilibrium requires that there is one alternative which can win a majority in a contest against any alternative. (2)Voting paradox The simple example: there are three voters and three alternatives, denoted A,B and C. A could be going to a movie, B to a basketball game, C renting a video. Voter 1 prefers A to B to C, Voter 2 prefers C to A to B, Voter 3 prefers B to C to A.
(2)Arrow’s impossibility theorem He showed that there was no rule that would satisfy all of the desired characteristics. This theorem is referred to as Arrow’s impossibility theorem. 8.Single-peaked preferences and the existence of a majority voting equilibrium There are some conditions under which the simple system of majority voting yields a determinate outcome. Single-peaked preference: each individual has a single peak to his preference profile. Double-peaked preference
Focus questions:
1.In what ways does collective decision-making –such as determining the level of public goods-differ from standard decision-making within a household? What is the problem of eliciting preferences? When individuals differ in what they want-say, about the level of expenditures on a public good-how are those differences resolved? What is meant by the problem of “aggregating preferences”? 2.Why may there not be a well-defined outcome when majority voting is used to resolve differences in views? Is there any voting procedure that yields a well-defined outcome, is it necessarily efficient? 3.What are alternative ways for determining the level of public good expenditures? Are there ways which ensure an efficient level of expenditures on public goods? 4.What are some of the ways in which politics affects the outcomes of public decision-making about resource allocatferences for public goods --There are three factors that determines an individual’s attitudes towards public-goods expenditure. First, some individuals may simply like public goods more than others. Second, individuals’ income differ. Third, the nature of the tax system To see these effects, consider first a situation where there are N people and each must pay the same amount, regardless of income. Under this system of uniform taxation the tax price is just 1/N and the tax payment is G/N. with proportional taxation, everyone pays the same percentage of income. The tax price can be easily calculated. If Y’ is average income, NY’ is total income; if t is the tax rate, then tNY’ is total government revenue. This must equal government expenditures: G= tNY’,thus, the tax rate is t=G/ NY’ the tax payment of an individual with income Yi is tYi=GYi/NY’
Two questions: (1)Are there voting rules that will ensure a determinate outcome for any vote? (2)Are there any circumstances under which simple majority voting will yield a determinate outcome? 7. Arrow’s impossibility theorem (1)An ideal political mechanism should have four characteristics: --transitivity --nondictatorial choice --independence of irrelevant alternatives --unrestricted domain
Assume we vote on A versus B. voters 1 and 2 vote for A, so A wins. Now we vote on A versus C. Voters 2 and 3 prefer C to A, so C wins. It appears that C should be the social choice. C wins against A, which wins against B. But let us now have a direct confrontation between C and B. Both voter 1 and voter 3 prefer B to C. This is referred to as the voting paradox, or the paradox of cyclical voting. There is no clear winner. (3) It may be very important to control the agenda, the order in which the votes occur. if individuals realize there is going to be a particular sequence of votes, they may wish to vote strategically.
If government expenditures increase by a dollar, the individual’s incremental tax is just Yi/NY’. Thus , an individual with average income faces a tax price of 1/N, an individual with above-average income faces a higher tax price, and an individual with belowaverage income faces a lower tax price. a progressive tax system is one in which tax payments increase more than proportionately with income. Accordingly, the tax price for a high income individual under a progressive tax system is typically greater than Yi/NY’. a regressive tax system is one in which tax payments increase less than proportionately. 5.The Problem of Aggregating Preferences
PUBIC MECHANISMS FOR ALLOCATING RESOURCES
1.Private mechanism for allocating resources the market economy provides a simple and effective method for determining the level of production of private goods: The price system 2.Public mechanism for allocating resources decisions about resource allocations in the public sector are made in quite a different manner. Individuals vote for elected representatives, these elected representatives in turn vote for a public budget, and the money itself is spent by a variety of administrative agencies. 3.The Problem of Preference Revelation the decision maker in private decisions knows his own preferences. The decision maker in public decisions has to ascertain the preferences of those on whose behalf he is making the decision.
6.Majority voting and the voting paradox (1)What is the majority voting A majority voting equilibrium requires that there is one alternative which can win a majority in a contest against any alternative. (2)Voting paradox The simple example: there are three voters and three alternatives, denoted A,B and C. A could be going to a movie, B to a basketball game, C renting a video. Voter 1 prefers A to B to C, Voter 2 prefers C to A to B, Voter 3 prefers B to C to A.
(2)Arrow’s impossibility theorem He showed that there was no rule that would satisfy all of the desired characteristics. This theorem is referred to as Arrow’s impossibility theorem. 8.Single-peaked preferences and the existence of a majority voting equilibrium There are some conditions under which the simple system of majority voting yields a determinate outcome. Single-peaked preference: each individual has a single peak to his preference profile. Double-peaked preference