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Lecture Notes2
Lecture Notes2
Lecture Notes2
PUBLIC CHOICE
Key Points
1. The alternative selected by a community using simple majority rule voting is the alternative
preferred by the median voter(s), that is, the voter(s) whose preferred alternative is the median of
the distribution of all voters’ preferred alternatives.
2. Simple majority rule is not necessarily the most efficient voting rules for at least five reasons: (1)
it may not choose the efficient alternative, (2) there may not be an alternative that is uniquely
preferred by a majority of voters, (3) it does not guarantee that all voters have an equal voice, (4)
it is not the lowest cost voting rule, and (5) it does not reflect how strongly voters feel about the
alternatives.
Synopsis
When government provides goods, decisions about how much of each good or service to supply and
how to supply them are made by a collective decision or political process, usually voting. The
application of economic analysis to the study of political processes is called "public choice".
We begin with a simple model of voting using simple majority rule. We derive the most fundamental
result of public choice, the median voter theorem, which says that simple majority rule voting chooses
the alternative that is preferred by the voter(s) with the median preference.
Next, we show that simple majority rule is not necessarily the most efficient voting rule, that other
voting rules are often more efficient than simple majority rule. There are at least five reasons that
simple majority may not be the most efficient voting rule. We look at the five reasons. We then look
briefly at cumulative voting or point voting as an alternative to simple majority rule.
Finally, we consider a political process where bureaucrats have some monopoly power over the
political agenda. Voters cannot choose among all possible alternatives but can choose only among the
alternatives presented to them by the bureaucrats. We look at the reversion model as an example of a
monopoly bureaucratic model of voting.
Lecture Notes
A. Assumptions
1. The costs of the good or service are divided equally among all
individuals in the group.
2. Voting is binary, meaning that the voters choose between only two
options (for example, shall the level of expenditure increase, yes or
no?).
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Public Choice
B. Median voter theorem: Under assumptions (1)-(3) above, the quantity of a good or
service or the level of expenditure chosen by simple majority rule is the quantity or
expenditure level preferred by the median voter. See Power Point Slides Figure 2-1.
1. Median voter: The median voter is the individual whose preferred quantity or
expenditure level is the median of the distribution of preferred quantities or
expenditure levels of all voters.
2. Suppose there are three voters, Huey, Dewey, and Louie. Huey prefers $2500
per pupil of education expenditure, Dewey prefers $5000 per pupil, and
Louie prefers $7500 per pupil. Dewey is the median voter. According to the
median voter theorem, if the decision is made by simple majority rule, annual
education expenditure will be $5000 per pupil.
C. Applications of the median voter theorem in the economics of state and local
government
1. Intergovernmental grants
2. Property taxes
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Public Choice
D. The median voter theorem is a useful model for analyzing and predicting the outcome
of simple majority rule voting.
A. Simple majority rule is not necessarily the most efficient voting rule.
1. Process problems: The voting process using simple majority rule may be less
efficient than the voting process using other voting rules because other rules
(1) may provide greater equality of political influence and (2) may have
lower costs.
2. Outcome problems: The voting outcome using simple majority rule may be
less efficient than the outcome using other voting rules because (1) the
outcome of simple majority rule voting may not be the economically efficient
quantity or expenditure level, (2) the outcome of simple majority rule voting
may not be unique because of the cyclical majority or paradox of voting, and
(3) other voting rules more closely reflect the strength or intensity of voter
preferences.
B. Majority rule does not guarantee that all voters have an equal voice in the political
process.
1. With simple majority rule, all voters have the same number of votes, but an
equal distribution of votes alone does not guarantee equal political power or
influence.
2. The degree of political power depends on many things other than just the
number of votes assigned to each individual. For example, the political
power of wealthier individuals and groups, of individuals and groups who
have more time to devote to political activity (labor unions and their
members), and of individuals and groups who are more intensely interested
in and affected by the outcome (activists and special interest groups) is
greater than their share of the votes. Conversely, the political power of other
groups is less than their share of the votes.
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ECO 4554: Economics of State and Local Government
Public Choice
b. Administrative cost
c. External cost
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ECO 4554: Economics of State and Local Government
Public Choice
3. The lowest cost political decision rule See PowerPoint Slides Figure 2-2.
a. The lowest cost voting rule is the rule that minimizes the sum of the
administrative cost and the external cost. Simple majority rule is not
necessarily the lowest cost rule. The lowest cost rule could be either
larger or smaller than a simple majority.
Cost
0% 40% 100%
In this illustration, the lowest cost voting rule is a 40% plurality rule.
[Note: The point at which A and E intersect has no special
significance. It is simply the voting rule at which administrative cost
and external cost are exactly equal. It does not necessarily
correspond to the lowest point on the S curve.]
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ECO 4554: Economics of State and Local Government
Public Choice
D. Simple majority rule often does not choose the economically efficient alternative. See
PowerPoint Slides Figure 2-3 and Example 2-1.
1. If the tax system imposes on the median voter a share of the marginal cost of
the good exactly equal to her/his share of the marginal social benefit, then the
quantity preferred by the median voter is the efficient quantity. Simple
majority rule would then result in choice of the efficient quantity.
2. However, if the tax system imposes on the median voter a share of the
marginal cost that is different from her/his share of the marginal social
benefit, then the median voter prefers some quantity other than the efficient
quantity. Simple majority rule does not choose the efficient quantity.
a. If the tax system assigns less than 30% of the marginal cost to
Dewey, his share of the marginal social benefit is greater than his
share of the marginal social cost and he prefers a quantity greater
than the efficient quantity.
b. If the tax system assigns more than 30% of the marginal cost to
Dewey, his share of the marginal social benefit is less than his share
of the marginal social cost and he prefers a quantity smaller than the
efficient quantity.
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E. The quantity chosen by simple majority rule may not be unique or determinate or
stable.
a. Simple majority rule may cycle among the alternatives with each
alternative able to defeat at least one other alternative.
a. Assumptions
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ECO 4554: Economics of State and Local Government
Public Choice
Rank
Huey
1
Louie
2
Dewey
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Public Choice
peaked and there is no cycle. Simple majority rule chooses $5000 per
pupil no matter in what order the alternatives are considered. (Verify
this by working through the voting rounds in b.2 above with this new
set of preferences.)
Rank
Huey
1
2
Dewey
3 Louie
F. Majority rule does not reflect the intensity of individual voter preferences.
1. The outcome of a simple majority voting rule depends only on the rank
orderings of individual preferences. The outcome is independent of the
intensity of individual preferences.
2. To see this, note that an increase in the median voter's demand results in an
increase in the quantity of the good. If the strength or intensity of the median
voter’s demand increases, then the quantity of the good also increases.
However, an increase in any other voter’s demand has no effect on the
quantity chosen. No matter how strong the demands of other voters, only the
demand of the median voter matters.
III. Cumulative voting (or point voting): An alternative to simple majority rule
A. Illustration
1. Suppose that each individual in the group is given 10 points to assign in any
way s/he wishes.
2. The table below shows each voter’s rank order of preference among the three
alternatives and each voter’s assignment of points to the alternatives.
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Public Choice
3. With simple majority rule, only rank matters, and $5000 per pupil is chosen
by simple majority rule. With cumulative voting, the alternative with the
greatest point total is the winner. This is $2500 per pupil, and so $2500 per
pupil is chosen by cumulative voting.
4. With simple majority rule, the alternative preferred by the greatest number of
individuals wins without regard to how strong or how weak their preferences
are. With cumulative voting, the most strongly or intensely preferred
alternative wins without regard to how the voters rank the alternatives.
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Public Choice
2. The bureaucrats propose a budget to the voters. The voters may either
approve the proposed budget or reject it. If they reject it, then the budget
reverts to some pre-determined level such as last year’s budget or some
percentage of last year’s budget. The pre-determined level, called the
reversion level, is usually specified by law.
3. Thus, voters cannot choose among all possible budgets. They can only
choose between the proposed budget and the reversion budget.
1. The diagram below shows the median voter’s demand for road construction
and the median voter’s share of the marginal cost of road construction.
A Median Voter’s
Tax Share
B
Median Voter’s
Demand
Miles of Road
QR QV QB Construction
The median voter prefers QV miles of road construction. This is the quantity
that maximizes the median voter’s consumer surplus.
3. Both QR and QB provide less consumer surplus than QV. If the median voter
accepts the bureaucrats’ proposed quantity, the loss in consumer surplus is
area B. If the median voter rejects the bureaucrats’ proposed quantity in favor
of the reversion quantity, the loss in consumer surplus is area A. If the
bureaucrats propose a budget so that area B is smaller than area A, the
median voter accepts the bureaucrats’ proposed budget. If the bureaucrats
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ECO 4554: Economics of State and Local Government
Public Choice
propose a budget so that area B is larger than area A, the median voter rejects
the bureaucrats’ proposed budget.
4. The largest quantity that voters would accept is QB where area A=area B. To
ensure that voters accept their proposal, bureaucrats who want to maximize
their budget might propose a budget so that area B is just slightly smaller
than area A. Because they control the agenda, the bureaucrats are able to
increase the agency budget beyond the median voter’s preferred level, QV.
[Note that the distance from QV to QB equals the distance from QV to QR only
when the demand curve is a straight line. Comparing the loss in consumer
surplus between QV and QB to the loss in consumer surplus between QV and
QR is always correct no matter how the demand curve is shaped.]
a. A higher reversion level is better for the voters. The higher is , the
lower is . A higher reversion level reduces the maximum possible
loss to the voters from rejecting the bureaucrats’ proposal and
therefore limits the bureaucrats monopoly power.
b. A lower reversion level is better for the bureaucrats. The lower is the
pre-determined reversion quantity, the greater is the voters’ loss if
they reject the bureaucrats’ proposal and the larger the quantity that
bureaucrats can get the median voter to approve. In fact, the best
reversion quantity for the bureaucrats is zero so that if the median
voter refuses to accept the bureaucrats’ proposed quantity, there will
be no road construction at all. This is an “all-or-none” or “take–it-or-
leave-it” system, which gives the bureaucrats maximum monopoly
power.
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