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Public Choice Theory

Public Choice Theory. Microeconomics Dr. D. Foster. Political Choices . . . Economic Reasoning. Not how the system should work . . . How the system does work. Are politicians/bureaucrats/employees … -- rational ? -- self-interested ? -- like the rest of us ?.

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Public Choice Theory

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  1. Public Choice Theory Microeconomics Dr. D. Foster

  2. Political Choices . . . Economic Reasoning • Not how the system should work . . . • How the system does work. • Are politicians/bureaucrats/employees …-- rational ?-- self-interested ?-- like the rest of us ?

  3. Two Basic Decisions: How much to tax? How much to spend? • Vote for a new defense system? • Vote for a new social program? • What is the downside ? • Does President Haegerwant more $ for NAU? • Does Paul Gosarwant more $ for USGS? • Is there any incentive to keep costs down ?

  4. Perverted Incentives • No profit - no reward for efficiency. • Serving others doesn’t serve oneself. • No pricing mechanism to insure thatallocation is efficient. • At Q*, marginal value (P) = marginal cost • Criteria for “success” is majority. • vs. lower bar of profitability. • supersedes intensity. • Choices in the public sector are enforceable.

  5. VotingIssues • Not especially rewarding. • Should it be easy? Should it require a test? • Information is costly. • If your contribution is zero . . . • We can’t pick results only promises. • And, in a market . . . ? • What if the Academy Awards . . . ? • Benefits and costs are usually mismatched. • e.g., Flagstaff mayor’s race; CCC bond proposition. • Paradox of collective choice.

  6. Voting Systems • What’s so great about majority rule?-- It is just like football !! • The market results in proportional “rule.” • Public choices may be inconsistent. • Public choices may be inefficient. • Point voting ? Continuous elections ? • Non-geographic voting ?

  7. 50% 50% A A’ A” B’ B median voter The 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 !!

  8. Inconsistent outcome: 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 ?

  9. Inefficient outcome: 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 George – $ 90 Janet – $ 80 Will they vote to raise taxes to pay ? What can we do to alter the outcome ?

  10. Why is inefficiency a rational outcome? • Voters – information is costly (rational ignorance) -- Does your vote count ? -- Can you trust political ads ? • Special interests -- Spread costs; concentrate benefits. -- How about a Help-Dr.-Foster tax ? It’s a dime. • Bureaucrats -- What are their incentives ?-- Whom do they serve ?

  11. The Virtues of the Market • Trial and error achieves rational outcome. • Even imperfect markets are remarkably efficient. • Markets penalize incompetence & miscalculation. • Markets reward ability & foresight. • Markets encourage innovation. Can the government plan the “discovery” process?

  12. What Government can’t do: • Use “technical expertise” to guide economy. • Achieve “perfect market” outcomes. • Guarantee good results even with good intentions. • Ignore incentives and compatible processes. • Be benign nor efficient.

  13. What about global warming? • What are we talking about? • What is the basis for the alarm? • Do the alarmists have a good track record? • Are the alarmists scientists with appropriate expertise? • Do others, with similar expertise, disagree?

  14. Public Choice Theory Microeconomics Dr. D. Foster

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