Public Choice and the Political Process

Chapter 5

Have you ever thought about how many decisions affecting your daily life are made
through the political process?

 Everything from the quality of your local public educational system and road network
to the commitment of your country to military forces to war are determined through
political decisions.
 Politics also influences the amount of taxes you pay and how the burden of financing
government programs is distributed among citizens.
 Politics determines who gets income support from the government and which
businesses are the fortunate recipients of government subsidies.
 The political process is based on rules embodied in a nation’s constitution. In
democratic nations, citizens have the opportunity to vote on issues or for candidates
who take positions on those issues.
 The outcome of the process depends on voting and the behavior of a host of
characters including politicians, elected officials, special-interest groups, and
bureaucrats.
 The political process involves more than merely counting votes and deciding on the
rules for reaching agreement.

The theory of public choice…

- Studies how decisions to allocate resources and redistribute income are made through
a nation’s political system.
- The purpose of politics is to provide citizens with useful goods and services.
- Examines how the political process is used to determine the quantity of goods and
services supplied by governments.

THE SUPPLY OF PUBLIC GOODS THROUGH POLITICAL INSTITUTIONS:

THE CONCEPT OF POLITICAL EQUILIBRIUM

Public Choice
- It is one made through political interaction of many people according to established
rules.
- The supply of a public good through political institutions requires agreements on the
quantity of the public good and the means of finance. Political institutions rarely require
unanimous agreement on both the quantity of the public good to produce and the cost-
sharing scheme.
- A variety of public choice rules are used to make decisions in communities, the most
familiar of which is majority rule.
- Under government supply of goods and services, taxes rather than voluntary
contributions are usually used to finance the goods and services provided.
 - Individual citizens can veto proposed outcomes if they are dissatisfied with their share
of the costs.

Political Equilibrium
- It 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.

Tax Shares
- Sometimes called tax prices, are preannounced levies assigned to citizens and are
equal to a portion of the unit cost of a good proposed to be provided by government.
- These tax shares represent price per unit of a government-supplied good. The sum of the
tax shares must equal the average cost of the public good to avoid budget surpluses
or deficits.
- The cost of producing a public good, influences the amount of taxes that citizens must
pay to finance the production of each unit of the good.
- Debates preceding an election may influence the willingness of voters to support various
levels of output of the public good.
- Political campaigns provide information on both the costs and the benefits of the
alternative programs being offered to voters for their consideration. It is an
important factor influencing collective choices and their efficiency.

 Proposals that cannot gain approval under unanimous consent might very well
be approved under majority rule.
 In general, the smaller the proportion of the community required to approve
any given issue, the greater the probability the issue will be approved.

Simple Majority Rule

- In which, a proposal is approved if it receives more than half the votes cast in an
election.

ELECTIONS AND VOTING

Election - An election is a formal group decision-making process by which a population

chooses an individual or multiple individuals to hold public office. ... To elect means "to select
or make a decision.”
Voting - Voting is simply choosing your chosen candidates that you want to take a certain
position.

 Public choices are made formally through elections in which each individual is usually
allowed one vote. The economic analysis of the political process assumes that people
evaluate the desirability of goods supplied by government in the same way they consider
market goods and services. They are presumed to vote in favor of a proposal only if they will
 be made better off by its passage. A rational person’s most-preferred political outcome is 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. This level of output of the good
provides the maximum possible satisfaction to that person. Increasing the quantity of the
government-supplied good a fraction of a unit over this amount would make the person
worse off.

To Vote or Not to Vote

A person’s decision to vote depends on the benefits and costs of doing so, as well as on
the probability that voting will help to achieve the anticipated benefits. The individual also
might receive benefits from voting that do not necessarily depend on whether the desired
alternative is approved. One such benefit is the pleasure received from exercising the duties of
being a citizen.

A person’s decision to vote depends on the benefits and costs of doing so.
Benefits:
 The probability that voting will help to achieve the anticipated benefits. The individual
also might receive benefits from voting that do not necessarily depend on whether the
desired alternative is approved.
 Another benefit is the pleasure received from exercising the duties of being a citizen.

Costs:
 One of the costs involved in voting is the time and effort it takes to go to the polls.
 Other costs include those of gathering the information necessary to make a choice. This
involves reading newspapers and going to meetings to understand the issues and positions
of the candidates. This can be a time-consuming process.

Abstention - is a term in election procedure for when a participant in a vote either does not go
to vote on election day or, in parliamentary procedure, is present during the vote, but does not
cast a ballot.

Free riding - occurs when one firm or individual benefits from the actions and efforts of
another without paying or sharing the costs.

Rational Ignorance
Rational ignorance is the lack of information about public issues that results because
the marginal cost of obtaining the information exceeds the apparent marginal benefits of doing
so. When voting for congressional representatives, few people take the time to find out where
candidates stand on all the issues and what taxes the candidates support. As a result, many voters
who do vote may be making decisions that are not in their own interests. For example, voters
who do not research their decisions might actually vote in favor of extensions of public services,
such as roads, beyond the point at which marginal benefits to them fall to equal the marginal
costs they must bear as a result of the public choice.
Determinants Of Political Equilibrium
1. Voting Rules
2. Average and Marginal Costs of the Public Goods
3. Information
4. Distribution of Taxes
5. Distribution of Benefits

 In any election each of these determinants of political equilibrium affects the

outcome. All candidates seek to formulate policies that will give them a
majority of the votes cast. In some elections the issue of tax increases and
decreases and the distribution of tax burden were important.
 Walter Mondale’s pledge to raise taxes that might very well have been a
major fact contributing to his defeat in the 1984 presidential election. In
1988 election, George Bush pledge not to raise taxes and emphasized that a
great deal of uncertainty surrounded the cost and benefits of programs
proposed by Michael Dukakis who argued that the proposal made by Bush
will favor to rich. Dukakis argued that his programs for spending and
taxation would provide more benefit to middle income groups. In 1992
presidential election, Bill Clinton promised to raise taxes on upper income
groups to help reduce the budget deficit. In 1996 presidential election,
Both Bill Clinton and Bob Dole vowed to reduce taxes and cut the deficit.
In 2000 election, both George W. Bush and Al Gore sought to reduce
taxes and to appeal to middle income voters. During the 2004 presidential
campaign, George W. Bush once again promised not to increase taxes
despite a growing federal budget deficit and increasing military expenses
during the wars in Iraq and Afghanistan. In 2008, the median voter appeared
to be growing less conservative on issues relating to military activities,
taxation, and the economy and the result was a major victory by the
democratic candidate, Barack Obama over the more conservative
republican candidate John McCain.

A MODEL OF POLITICAL EQUILIBRIUM UNDER MAJORITY RULE.

To illustrate political equilibrium under simple majority rule, assume that citizens must
decide on the quantity of a pure public good to produce. Given the average cost of producing
the good, a tax-sharing scheme is announced whereby each individual will pay the same tax per
unit of the good.
If the good can be produced under conditions of constant costs and there are n individuals
in the community, each individual will pay a tax equal to AC/n per unit of the public good.
 Assuming seven voters, Figure 5.2 shows the marginal benefit curves of the voters, the
marginal (and average) cost line for the public good, and the tax share per unit of the public good
of each of the voters.

Suppose that the seven voters, whose marginal benefit curves are subscripted A, B, C, M,
F, G, and H, respectively, constitute a community of people trying to provide themselves with
security protection. Assume that the quantity of protection provided varies with the number of
security guards hired per week to patrol their neighborhood. Security protection services have all
the characteristics of a pure public good for the seven members of the community. Given their
tax shares per guard, each of the seven individuals has his or her own most-preferred output
level, corresponding to the point where each marginal benefit curve crosses the tax share line, t,
in Figure 5.2. Suppose the cost of each security guard is $350 per week. This represents both the
average and the marginal cost of security protection. The weekly tax share of each voter per
security guard will be $50 if the tax shares are to be equal for each voter. This is because AC/n
$350/7 = $50.
If security protection were a private good available at price t per unit, each person would
be able to consume the most-preferred amount of the good, which ranges from one to seven
security guards per week. However, because it is a pure public good, all must consume the same
quantity. That quantity is the number of security guards per week that can gain approval under
majority rule.

ELECTION RESULTS UNDER MAJORITY RULE

Elections now will be held to approve or disapprove successive increases in the output
of the public good. Proposals to increase production from zero to any positive amount will be
successively voted on. As long as a proposal to increase the amounts of guards per week by one
more unit achieves more than half the seven votes, it will pass. Therefore, at least four votes are
required for a proposal to pass. Assume that all members of the community vote.
Table 5.1 shows the vote tallies for each election and the results, as referenda to increase
output from zero to seven are successively held. The election held to increase output from zero to
one unit of security protection passes unanimously, because the marginal benefit of the first unit
is not less than the tax cost of that unit for any of the voters. As shown in the tally sheet, all vote
yes.
A proposal then is made to increase weekly security protection by increasing the number
of guards from one to two per week. This proposal also passes under majority rule. Only
voter A votes against this proposal. She does so because the marginal benefit of the second
security guard falls short of the extra taxes, she will have to pay per week to finance that extra
protection (MBA <$50). Under majority rule, the proposal to increase output to two guards per
week passes 6 to 1 even though an individual is made worse off by the move. Similarly,
expansion in the output of the public good to three and four units per week obtains the majority
necessary for passage. This is because at least half the members of the community will be made
better off when the number of security guards increases up to four per week.
Increases in the output of the public good beyond four security guards per week,
however, will not receive a majority of votes. The election to expand output to five guards per
week, for example, will receive only three yes votes. The other four voters will have reached
levels of consumption at which marginal benefits are less than their tax shares and therefore vote
no.
 The political equilibrium under majority rule and equal tax shares, given the marginal
benefit curves shown in Figure 5.2, will be four security guards per week. If voters were asked to
choose between this number of guards and any alternative number, four would win. This is
because four guards per week is closer to the most-preferred outcome of a majority of voters. As
long as the alternative of four guards per week is put on the ballot, it will emerge as the political
equilibrium under simple majority rule.

The Median Voter

- It is the one whose most-preferred outcome is the median of the most-preferred
outcomes of all those voting.
- In Figure 5.2, the voter with the marginal benefit curve MB M is the median voter. The
most-preferred outcomes of all voters range from one to seven security guards per week.
Voter M’s most preferred outcome is the median of four guards per week. Three voters
have a most-preferred outcome of less than four guards per week, and three voters have a
most-preferred alternative of more than four guards per week.

Political Externalities
- This are losses in well-being that occur when voters do not obtain their most-
preferred outcomes, given their tax shares.
- Political externalities would be zero if the tax shares of all voters of government goods
and services were adjusted until they equaled the marginal benefits received from
government output.
- Do not confuse political externalities with market externalities:
 Market externalities are costs or benefits of market exchanges not reflected in
prices.
 Political externalities are costs borne by those who would like to have either
more or less of a government good or service, given their tax shares, than the
amounts agreed upon through political interaction.
 - If all decisions were made under unanimous agreement, political externalities would
not exist. This is because any single voter could veto a proposal if they did not attain
their most-preferred political outcome.

Political Transactions Costs

- It measures the value of time, effort, and other resources expended to reach and
enforce a collective agreement.
- These are additional costs of the political process that must be considered in evaluating
the efficiency of government supply compared with market supply.

Political institutions that require high percentages of agreement in the population before
increments in government activity can be undertaken, are likely to result in a minimal amount of
political externalities.
On the other hand, rules that require close to unanimous agreement are likely to take a great
deal of time and effort before an agreement can be achieved.
In choosing political institutions, citizens must weigh the political externalities associated
with these rules against the political transaction’s costs of the rules.

Bureaucratic Inefficiency
- If bureaucrats do not produce their output at minimum possible cost, or if they succeed
in getting more than the efficient amount approved, losses in net benefits to citizens
will occur.

THE POLITICAL PROCESS

A prerequisite to the study of the political process is an analysis of how political
institutions themselves are established. In almost all nations, the rules for making choices on
issues of common interest comprise a constitution. In effect, a constitution pairs choices
regarding specific activities with a specific decision rule. Those activities for which the
constitution specifies no rule are usually left as private or market decisions.

Constitutions
Constitutions are the generally accepted set of rules by which decisions are made in a
society. Constitutions may be written or unwritten. They evolve over time, and they are
generally accepted by individuals comprising a society.
According to Meriam Webster Dictionary, constitution is the basic principles and laws of
a nation, state, or social group that determine the powers and duties of the government and
guarantee certain rights to the people in it. And/or, a written instrument embodying the
rules of a political or social organization.
A Classification of Collective Choice Rules
Alternative decision rules may be classified on a spectrum according to the percentage of
the community required to reach the decisions. On this basis, rules run the gamut from zero
percent to 100 percent of the voters. If a community has N voting citizens, then the proportion of
voters required to reach a decision under simple majority rule will be (N/2 + 1)/N. If unanimous
consent is required, the proportion will be N/N, or 1. If a minority rule is chosen, then the
required proportion of voters necessary to make the choice will be less than one-half.

Minority Rule
The extreme form of minority rule is that in which decisions are made by only one
member of the community. In other words, only one vote will pass an issue. In the case where
the decisions are always made by one specific individual, the result is monarchy (or
dictatorship). It is even possible to conceive of a voting rule where decisions are made by zero
percent of the population.
According to Lexico which powered by Oxford dictionary, minority rule is a system of
government in which the governing party of a country represents only a small proportion of
the overall population.

Majority Rule
Simple majority rule, which we have already analyzed, merely requires agreement among
approximately 51 percent of the community. This is a rule commonly used to elect
representatives in most countries.
For simple majority rule, it is quite possible that slightly less than one-half of the
community will be dissatisfied with the resultant decision. For the case of the two-thirds (67%)
majority rule, the maximum possible amounts of dissatisfied voters decline to about 33
percent of the voting population.
According to Cambridge Dictionary, majority rule is the system of giving the largest
group in a particular place or area the power to make decisions for everyone. Government by
majority rule can be a threat to minority rights.

Choice of the Collective Decision-Making Rule

 This technique is to concentrate on the factors from the point of view of the
individual voting members of the community. Each individual weighs the costs and benefits of
alternative decision rules in relation to his or her own particular interests. Political externalities
decline as higher proportions of the community are required for collective agreement.
Most nations actually employ a multitude of decision-making rules. Indeed, it is the
essence of a constitution to embody a set of diverse decision rules.

Costs and Benefits of Collective Action

The benefits of collective action may be measured by the efficiency gains obtained from
the internalization of any external effects of private action. The costs of collective action are
the sum of newly generated political externalities and the transactions costs of collective choices.
The political process can be expected to generate political externalities for all decision-making
rules aside from unanimity.
The actions of the citizens’ positive voting on any issue passed according to some
decision rule result in political externalities being imposed on those citizens who voted
negatively on the issue and are therefore dissatisfied with the resulting decision. For example,
the individual who is forced by majority rule to bear an increase in taxes to finance increased
public services from which he receives no benefits is bearing political externalities of the
political process. For any single individual, the political externalities associated with any one
particular activity may be defined as the costs he expects to bear as a result of the actions of
others through the political process.

Unanimous Consent
The rule of unanimity has the advantage of allowing only Pareto-efficient changes to be
approved. As long as any particular issue must receive the approval of all voters before being
enacted, it remains impossible for any one individual to be made worse off while others are
made better off.
Unanimous consent as a collective choice rule is capable of approving only those
measures that result in net gains at zero cost to others. The advantages of unanimous consent in
terms of its potential for achieving only Pareto-efficient outcomes must be balanced against its
potential costs.

Plurality Rule
Plurality rule is a commonly used collective decision-making rule when at least three
alternatives are on the ballot. An obvious disadvantage of simple majority rule in such cases is
that when more than two alternatives are on the agenda, no single one may receive a simple
majority. This may lead to high transactions costs and runoff elections.
 Such a voting rule often allows a minority to decide. For example, if there are three issues
on the ballot and the vote is split 32, 32, and 36 percent, the alternative receiving the 36 percent
will be declared the winner—despite the fact that 64 percent of the electorate voted against it.

POLITICAL PARTIES AND THE POLITICAL EQUILIBRIUM

Individuals with similar ideas on the role of government and other issues often group
together to form political parties. Politicians seek elective office for a variety of reasons: power,
prestige, desire to serve others, and personal financial returns after leaving office. They are
influential in formulating the alternatives that are presented to voters and in dispersing
information on the relative merits of alternative measures and candidates on the agenda for
approval. When information is scarce, the behavior of politicians can be influential in
determining the actual political equilibrium that emerges.

BUREAUCRACY AND THE SUPPLY OF PUBLIC OUTPUT

 Bureaucracy it is in charge of implementing public choices made through
political institutions. The bureaucracy itself influences the actual delivery of
services and the efficiency with which such services can be produced.

Problems exist in measuring the efficiency of production by bureaucrats:

1. In most cases, the output produced is neither easily quantifiable into units nor easily
sold for profit in the markets.
2. For private firm competing with other firms producing a similar output, such
information rapidly made available to owners through the firms profit and loss
statement.

Bureaucratic Behavior
 According to William Niskanen, he argued that bureaucrats seek to maximize the
power associated with holding public office. Such power is likely to correlated
with the resources that the bureaucrat has under command. This, in turn is related
to the size of the bureau’s budget.
 Figure 5.9 shows the bureaucratic incentive to supply more than efficient amount
of output. The marginal social benefit and marginal social cost of the bureau’s
output per year are shown in Figure 5.9 A while on the Figure 5.9 B they
illustrated where the total social benefit and the total social cost of the bureau’s
output are plotted.
REVIEW QUESTIONS:

I. IDENTIFICATION

__________ 1. It is the one made through political interaction of many people according to
established rules.
__________ 2. It is sometimes called tax prices.
__________ 3. It is the term in election procedure for when a participant in a vote either does not
go to vote on election day.
__________ 4. It is a formal group decision-making process by which a population chooses an
individual or multiple individuals to hold public office.
__________ 5. It occurs when one firm or individual benefits from the actions and efforts of
another without paying or sharing the costs.
__________ 6. Promised to raise taxes on upper income groups to help reduce the budget deficit.
__________ 7. Pledge to raise taxes that might very well have been a major fact contributing to
his defeat in the 1984 presidential election.
__________ 8. It is the generally accepted set of rules by which decisions are made in a society.
__________ 9. It is commonly used collective decision-making rule when at least three
alternatives are on the ballot.
__________ 10. Simple majority rule merely requires agreement among approximately, how
many percent of the community?

II. ESSAY.
1. What are political externalities?
2. Discuss the importance of voting.
3. Discuss the difference between majority and minority rule.
Prepared by:

Pascasio, Spencer John L.

Asinas, Rizelle Anne A.
Balaong, Rose Marie F.
Dela Cruz, Jannice Hoop

BSBA Financial Management 3A

Mr. Armando Lorenzo C. Robles

Professor in Public Finance