Public Choice Theory

Microeconomics

Dr. D. Foster

Political Choices . . . Political Choices . . . Economic ReasoningEconomic Reasoning

Not how the system shouldshould work . . . How the system doesdoes work.

Are politicians/bureaucrats/employees …-- rational ?-- self-interested ?-- like the rest of us ?

Two Basic Decisions: Two Basic Decisions: How much to tax? How much to tax? How much to spend?How much to spend?

Vote for a new defense system? Vote for a new social program?

What is the downside ?What is the downside ?

Does President Haeger President Haeger want more $ for NAU? Does Paul Gosar Paul Gosar want more $ for USGS?

Is there any incentive to keep costs down ?Is there any incentive to keep costs down ?

Characteristics of the Public SectorCharacteristics of the Public Sector

Choices are enforceableenforceable.-- stop lights-- military draft-- drug laws-- eminent domain

Choices are restrictedrestricted (“lumpy”)-- Grand Canyon: buses or train?-- Chose candidate A or B?-- Is there any difference . . .

The Median Voter ModelThe Median Voter Model

If preferences are peaked . . . If we vote for the person closest to us . . .

Candidates should congregate near the middle!

Candidate A wins !!

median voter

50%50%

A BA’ B’A”

Voting SystemsVoting Systems

What’s so great about majority rule?What’s so great about majority rule?-- It is just like football !!

The market results in proportionalproportional “rule.”

Public choices may be inconsistent.inconsistent. Public choices may be inefficient.inefficient.

Point voting ? Continuous elections ? Non-geographic voting ?

Inconsistent outcome: Inconsistent outcome: Want a park?Want a park?

City council has 3 choices for land parcel:A – Turn it into a park.B – Use it for low-income housing.C – Allow for commercial development.

Polling indicates that:40% favor A > C > B35% favor B > A > C25% favor C > B > A

How do you frame a vote between just two ?How do you frame a vote between just two ?

Inefficient outcome: Inefficient outcome: Build a road?Build a road?

A road can be built that benefits 3 people. The cost is $300, and each would pay an equal share. They benefit as follows: John – $ 200$ 200 George – $ 90$ 90 Janet – $ 80$ 80

Will they vote to raise taxes to pay ?Will they vote to raise taxes to pay ?

What can we do to alter the outcome ?What can we do to alter the outcome ?

Why is inefficiency a rational outcome?Why is inefficiency a rational outcome?

VotersVoters – information is costly (rational ignorance) -- Does your vote count ? -- Can you trust political ads ?

Special interestsSpecial interests -- Spread costs; concentrate benefits. -- How about a Help-Dr.-Foster tax ? It’s a dime.

BureaucratsBureaucrats -- What are their incentives ? -- Whom do they serve ?

Case Study: 1986 Congressional RaceCase Study: 1986 Congressional RaceDistrict #1 – State of HawaiiDistrict #1 – State of Hawaii

Cec Heftel wants to run for Governor !

He is currently the US Rep. for District 1.

Mid-summer 1986

One problem: He must resign to run !

So, he resignsSo, he resigns

Need #1Need #1: Fill vacancy through Jan. 1987.

Need #2Need #2: Select nominees for general election.

Need #3Need #3: Elect Congressman in November.

Mid-summer 1986

PrimarySeptember

GeneralNovember

Elections

Solution: Combine #1 & #2 in September.Solution: Combine #1 & #2 in September.

The PlayersThe Players Mid-summer

1986Primary

SeptemberGeneral

November

Elections

Pat Saiki (R)Pat Saiki (R)

Neil Abercrombie (D)Neil Abercrombie (D)

Mufi Mufi Hanneman (D) Hanneman (D)

The RulesThe RulesAnyone can vote in the primary.Anyone can vote in the primary.

Mid-summer 1986

PrimarySeptember

GeneralNovember

Elections

The TwistThe TwistSaiki has no discernable competition.Saiki has no discernable competition.

A graphical look at public supportA graphical look at public support

Mid-summer 1986

PrimarySeptember

GeneralNovember

Elections

N.A. M.H. P.S.

September Results:September Results:

Pat Saiki wins Pat Saiki wins Republican primary.Republican primary.

Mufi Hanneman wins Mufi Hanneman wins Democratic primaryDemocratic primary

Mid-summer 1986

PrimarySeptember

GeneralNovember

Elections

Neil Abercrombie wins Neil Abercrombie wins Special Election !!!Special Election !!!

November Results:November Results:

Mid-summer 1986

PrimarySeptember

GeneralNovember

Elections

Pat Saiki wins Pat Saiki wins election !!!election !!!

RepublicansRepublicans voted for voted for MufiMufi in in primary - the “weaker” candidate, primary - the “weaker” candidate, and and he winshe wins!!!!!!

RepublicansRepublicans & & DemocratsDemocrats have an have an incentive to vote for their favorite in incentive to vote for their favorite in the special election; the special election; Neil winsNeil wins!!!!!!

Abercrombie supporters Abercrombie supporters voted for voted for Saiki in general election - Saiki in general election - retribution against Mufi’s campaign.retribution against Mufi’s campaign.

What happened ?What happened ?

SaikiSaiki won a second term (1988-1990). won a second term (1988-1990). SaikiSaiki ran for senate in 1990 - lost ran for senate in 1990 - lost

-- was selected to run SBA by Bush I. -- was selected to run SBA by Bush I. AbercromieAbercromie ran again, and won, in 1990. ran again, and won, in 1990.

-- served until 2010. -- served until 2010. HannemanHanneman lost 1990 race for District 2. lost 1990 race for District 2.

-- later served on Honolulu City Council. -- later served on Honolulu City Council. Cec Cec HeftelHeftel lost bid for governorship. lost bid for governorship.

DebriefDebrief

AbercromieAbercromie wanted to be governor in 2010. wanted to be governor in 2010. -- resigned from District 1 seat in 2010! -- resigned from District 1 seat in 2010!

HannemanHanneman becomes Honolulu mayor in 2004. becomes Honolulu mayor in 2004. -- re-elected in 2008. -- re-elected in 2008. -- wants to be governor in 2010! -- wants to be governor in 2010!

AbercromieAbercromie wins primary and general elections. wins primary and general elections. DjouDjou becomes interim Rep. for District 1. becomes interim Rep. for District 1.

-- loses general election. -- loses general election.

Debrief IIDebrief II

Public Choice Theory

Microeconomics

Dr. D. Foster