ECO 481: Public Choice Theory

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ECO 481Public Choice Theory

• The Failure of Democracy
• Voting Rules

Dr. Dennis Foster
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The Nature of the Polity

• 4 (self-interested) groups
• Elected officials - want more votes
• Voters - want more income wealth.
• Bureaucrats - want income, security, budgets.
• Special Interests - want wealth ( income).
• As rational utility maximizers, they . . .
• Cope with scarcity and uncertainty.
• Experience diminishing marginal benefits to
  action.
• Experience increasing marginal cost to action.

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The Nature of the Polity

• Decisions f(incomplete information).
• Decisions f(an environment of poor incentives).
• Decisions ? a lot of waste.
• Decisions ? exploitative and destructive to
  individual rights.

Few people possess the wisdom and information to
divine the best interest of others, and still
fewer offer to continuously sacrifice themselves
to improve the well-being of others.
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Collective Choice

• Requires rules
• Majority rule? Plurality? Super majority? Hare?
• There must be winners and losers.
• And, in markets . . . ?
• Pricing problems (Who? How much?)
• Govt. as monopoly w/coercive power.

Government is not reason it is not eloquentit
is force. Like fire, it is a dangerous
servantand a fearful master.
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Voting Issues

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

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The Politician and Your

• To them, its OPM.
• Incentive to get moneys worth?
• e.g., FUSD and the Pentagon.
• To earn votes, spend wisely.
• Visible, stream of benefits, needed Investment
• e.g. bus systems, community centers, food stamps.
• To minimize lost votes, tax wisely.
• Invisible, in the public interest, dispersed
• except soak the rich, which means, soak the
  minority.
• Tax tourists!
• Practice the art of compromise bargain.

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When you must cut back

• Cut fraud and waste!
• Sacrifices made across the board.
• Cut areas that have least resistance.
• Rely on natural rollover to reduce costs.
• NAUefficienciesproportional cutsbuyoutscut
  support staffmarket adjustments

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A Taxing Decision

• Raise base/rate on existing tax.
• Sin taxes.
• Crisis tax.
• Earmark tax to popular spending.
• So, how much support for a FAIR tax?
• Mandate spending to lower govt units.
• Tax positive events and call them licenses.
• At natl level, print money inflation tax
• Can we rely on any fiscal constraint?

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Aside - Bureaucracy

• Budgets about 2x private sector.
• With no competition, we rely on oversight.
• How to survive lean times?
• Insulate budget from annual scrutiny.
• Get earmarked funds.
• Add new services.
• Spend all your budget.
• When cut, threaten to eliminate most popular
  programs.

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Bureaucracy

• Without pricing, planning substitutesfor
  rational economic calculation.
• Odd success strategy - poor customer service!
• Who raises prices during a recession?

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Special Interests

• Actions motivated by rent seeking.
• They are not out to improve the system.
• Headquartered in D.C. (e.g. SFA)
• Limits Competition, expensive, free riding,
  encourages opposition.

Democratic politics are not really government by
the people but rather an intense competition for
power by means of votes among contending
politicians. In that competition, politicians
find it highly rational to engage in obfuscation,
play acting, myth making, ritual, the suppression
and distortion of information, stimulation of
hatred and envy, and the promotion of excessive
hopes.
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ECO 481Public Choice Theory

• The Failure of Democracy
• Voting Rules

Dr. Dennis Foster