Ch 31: Public Choice

Economic Theory Applied to Politics

Del Mar College
John Daly
2003 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
Democrats 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
persons 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 dont politicians do this?
An English literature professor comments that his students
are apathetic because they dont seem to be informed about
whats happening in the political realm. Comment.

More About Voting: Examples

Voting For A
Nonexcludable Public
Good
Voting And Efficiency

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.

Congressional Districts As 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 isnt 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 societys
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 total 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.