Public ChoiceEconomic Theory Applied to Politics

Del Mar College

John Daly©2002 South – Western Publishing, A Division of Thomson Learning

Public Choice Theory

• This is the branch of economics that deals with the application of economic principles and tools to public – sector decision making.

• People in the market sector and people in the public sector behave differently because the two sectors have different institutional arrangements.

Moving Toward the Middle:The Median Voter Model

Political candidates tend to move toward the middle of the political spectrum. Starting with (a), the Republican receives more votes than the Democrat and would win if the election were held today. To offset this, as shown in (b), the Democrat moves inward toward the middle of the political spectrum. The Republican tries to offset the Democrat’s movement inward by also moving inward. As a result, both candidates move toward the political middle, getting closer to each other over time.

The Median Voter Model

Suggests that candidates in a two-person political race will move toward matching the preferences of the median voter (the person whose preferences are at the center or middle of the political spectrum).

What Does the Median Voter Model Predict?

• Candidates will label their opponent as either “too far right” or “too far left”.

• Candidates will call themselves “middle – of – the – roaders,” not right – or left – wingers.

• Candidates will take polls, and if they are not doing well in the polls and their opponent is, the will modify their positions to become more like their opponent.

• Candidates will speak in general, instead of specific, terms.

Costs and Benefits of Voting• Whether you vote for X, or vote for Y, the

outcome is likely to be the same. The probability of one person’s vote changing the outcome of the election is small.

• If many individual voters will vote only if they perceive their vote as making a difference, then they probably will not vote because their vote is unlikely to make a difference.

• The low voter turnouts that appear to be a result of voter apathy may instead by a result of cost – benefit calculation.

Rational Ignorance

• Many voter – citizens choose to be uninformed about politics and government because the benefits of becoming informed are often outweighed by the costs of becoming informed.

• Many persons believe that becoming informed is simply not worth the effort.

• On an individual basis, it makes sense to be uninformed about politics and government, to be in a state of rational ignorance.

Q & A

• If a politician running for office does not speak in general terms, does not try to move to the middle of the political spectrum, and does not take polls, does it follow that the median voter model is wrong?

• Voters often criticize politicians running for office who do not speak in specific terms (tell them what spending programs will be cut, whose taxes will be raised, and so on). If voters want politicians running for office to speak in specific terms, then why don’t politicians do this?

• An English literature professor comments that his students are apathetic because they don’t seem to be informed about what’s happening in the political realm. Comment.

Special Interest Groups

Special Interest Groups are subsets of the general population that hold intense preferences for or against a particular government service, activity, or policy. Often special interest groups gain from public policies that may not be in accord with the interests of the general public.

Informational Content & Lobbying Efforts

• The more directly and intensely issues affect them, the greater the incentive of individuals to become informed about the issues.

• The special – interest group is able to sway politicians in its direction.

• Even if the general taxpayer were informed about the legislation being proposed by the special interest group, he or she would not be likely to argue against it because the benefits would not be worth the time and effort.

• We predict that Special – interest bills have a good chance of being passed in our legislatures.

Alternate “Special Interest Groups”• For some issues, a particular congressional district

may be a special – interest group.• Elected officials frequently use logrolling when

their representative district is acting as a special – interest group. Logrolling is the exchange of votes to gain support for legislation.

• Special interest legislation usually isn’t called by that name by the special interest group lobbying it. It is referred to as “legislation in the best interest of the general public”.

• Sometimes this message holds true, and sometimes it does not. But it is likely to be as forcefully voiced in the latter case as in the former.

Special – Interest Groups and Rent Seeking Behavior

• Special – interest groups often engage in rent – seeking behavior, which has consequences for society as a whole.

Rent Seeking• Rent Vs. Profit: the term rent refers to that part of the

payment to an owner of resources over and above that which those resources could command in any alternative use. When rent is the result of entrepreneurial activity designed to either satisfy a new demand or rearrange resources in an increasingly valuable way, then rent is usually called profit. Rent is not referred to as profit in a setting where no new demand is satisfied or no additional value is created. Rent seeking is the expenditure of scarce resources to capture a pure transfer.

• Rent Seeking Is Socially Wasteful: From society’s perspective, the resources used in rent seeking are wasted and make society (but not necessarily all individuals in society) poorer.

Rent Seeking

Brown and Smith are the only two people in a society in which the to9tal amount of resources, or the total income, is $10,000. Currently, Brown and Smith are located at point A on I1, where each receives some of the $10,000. Smith wants to move to point B, where he would receive more income than he does at point A. To try to bring this outcome about, he lobbies legislator to pass a law that will transfer income away from Brown to him. In other words, he is rent seeking. Because rent seeking activity uses resources in a socially unproductive way, there are fewer resources, or less total income, to divide between Brown and Smith. Still, Smith may not mind this if he has moved from point A on I1 to point C on I2, as a result of his rent seeking activities. Overall, Brown and smith are worse off (sharing $9,000 instead of $10,000), but Smith is better off at point C than at point A.

Q & A• The “average” farmer is likely to be better informed about

federal agricultural policy than the “average” food consumer. Why?

• Consider a piece of special – interest legislation that will transfer $40 million from group A to group B, where group B includes 10,000. Is this piece of special – interest legislation more likely to pass when group A includes 10,000 people or when group A includes 10 million people? Explain your answer.

• Give an example of public – interest talk spoken by a special – interest group.

• Why is rent – seeking activity socially wasteful?

Government Bureaucracy

A government bureaucrat is an unelected person who works in a government bureau and is assigned a special task that relates to a law or program passed by the legislature.

Government Bureaus: Some Facts• A government bureau receives its funding from the

legislature. Often, its funding in future years depends on how much it spends carrying out its specified duties in the current year.

• A government bureau does not maximize profits.• There are no transferable ownership rights in a government

bureau. There are no stockholders in a government bureau.• Many government bureaus provide services for which there

is no competition.• If the legislation that established the government bureau in

the first place is repealed, there is little need for the government bureau.

Government Bureaus: Some Consequences

• Government bureaus are not likely to end the current year with surplus funds. If they do, their funding the following year is likely to be less than it was this year.

• Because a government bureau does not attempt to maximize profits the way a private firm would, it does not watch its costs as carefully. Government costs are likely to remain constant or increase, but rarely fall.

Consequences of Bureaucracy• No one has a monetary incentive to monitor the

government bureau because no one “owns” the government bureau and no one can sell an ownership right.

• Government bureaus and bureaucrats are not likely to try to please the “customer” as private firms are because they have no competition and are not threatened by any in the future.

• Government bureaucrats are likely to lobby for the continued existence and expansion of the programs they administer. To behave differently would go against their best interests.