PUBLIC CHOICE AND POLITICAL PROCESS Introduction TOPIC TWO Introduction • Public choice is when decisions are made through political interaction of many people according to established rules. • The decision need not be unanimous but goes with majority rule. • It looks into how decisions to allocate resources and redistribute income are made through a nation’s political system. Introduction to Public Finance 1 Topic Two Introduction The political process is based on rules embodied in a nation’s constitution. TOPIC TWO Introduction • The political process involves more than merely counting votes and deciding on the rules for reaching agreement. • The theory of public choice studies how decisions to allocate resources and redistribute income are made through a nation’s political system. • The theory of public choice examines how the political process is used to determine the quantity of goods and services supplied by governments. Topic Two Introduction • The political process involves more than merely counting votes and deciding on the rules for reaching agreement. • The theory of public choice studies how decisions to allocate resources and redistribute income are made through a nation’s political system. • The theory of public choice examines how the political process is used to determine the quantity of goods and services supplied by governments. Topic Two Political Equilibrium • An agreement on the level of production of one or more public goods, given the specified rule for making the collective choice and the distribution of tax shares among individuals. • Tax shares, sometimes called tax prices, are pre-announced levies assigned to citizens. • They are a portion of the unit cost of a good proposed to be provided by government. ti = tax share to individual i ti = average cost of good Topic Two Political Equilibrium • Political campaigns provide information on both the costs and benefits and benefits of the alternative programs being offered to voters . • Voters are known to vote in favor if a proposal only if they will be made better off by its passage. • e.g. new constitution (Kenya 2010), Free Maternity care 2017,500,000 affordable houses(by the current government) Topic Two Elections and Voting Individual's Choice • The individual makes choices given what will be the most preferred political outcome to them. • Each person will favor the quantity of the government-supplied good corresponding to the point at which the person’s tax share is exactly equal to the marginal benefit of the good to that person. • Public choices are made formally through elections in which each individual is usually allowed one vote Topic Two Preferred Outcome for a voter Topic Two Explanation • The voter achieves maximum net satisfaction at point Z. This is the point at which MBi = ti. • The voter’s most-preferred political outcome corresponding to this point is Q* units of the public good per year. • If, however, output were to increase above Q* units per year, the extra taxes would exceed the extra benefit, and the voter would be made worse off. • A voter will vote in favor of any quantity of a public good as long as the marginal benefit of that quantity is not less than the marginal tax he or she must pay to finance that amount. The Choice to Vote or Not • A person’s decision to vote depends on the benefits and costs of doing so, as well as on the probability that voting will help to achieve the anticipated benefits. • Many citizens quite rationally believe that their votes will not make any difference in the outcome of an election especially when the number of voters is large. • Rational Ignorance is the idea that, to many voters, the marginal cost of obtaining information concerning an issue is greater than the marginal benefit of gaining that information. This leads the voter not to gather the information and not to vote. Topic Two Determinants of Political Equilibrium Factors that influence whether a public choice will result in approval or disapproval of any proposal … • The public choice rule itself, that is, the proportion of yes voters in relation to the number of voters required for approval on the issue. • The average and MC of the public good. • The information available to voters on the cost and benefit associated with the issue. • The distribution of tax shares among voters and the way in which extra taxes vary with extra output of the good provided. • The distribution of benefits among voters. Topic Two Political Externalities • Political Externalities are the losses in well-being that occur when voters do not obtain their most-preferred outcomes given their tax shares. • Political externalities would be zero if the tax shares of all voters of government goods and services were adjusted until they equaled the marginal benefits received from government output. • Political externalities are costs borne by those who would like to have either more or less of a government good or service, given their tax shares, than the amounts agreed upon through political interaction. Topic Two Political Transaction Costs • Political Transactions Costs are the measure of the value of time, effort, or other resources expended to reach or enforce a collective agreement. • These are additional costs of the political process that must be considered in evaluating the efficiency of government supply compared with market supply. Topic Two Political Processes Constitutions are the generally accepted set of rules by which decisions are made in a society. Constitutions may be written or unwritten. A Classification of Collective Choice Rules Minority Rule – the required proportion of voters necessary to make the choice will be less than one-half. Majority Rule - requires agreement among approximately 51% of the community. Examples of such rules in Kenya?....presidential win, appointees,… Topic Two Costs and Benefits of Collective Action Benefit: decrease in political externalities Cost: increase in political transactions cost Topic Two Possible Alternatives Methods for Decision Making • Unanimity – without any opposition • Relative unanimity (2/3, 7/8 etc.) • Plurality rule (more than 3 outcomes possible) • Point-count voting (enables voters to register the intensity of their preference) • Instant Runoffs Topic Two Voting on More Than one Issue at a time-Logrolling • Logrolling is the act of voting for something you would ordinarily vote against so that someone else will vote for something that they would ordinarily vote against. • This is typically done when people care deeply about passage of their issue and less about the other issue. E.g. six-piece voting Topic Two Contd • Implicit logrolling occurs when political interests succeed in pairing two (or more) issues of strong interest to divergent groups on the same ballot or the same bill. • In effect, each special-interest group is induced to support the program of another special-interest group in order to receive benefits from its most-favored program. E.g • When you vote for president, you automatically elect his/her running mate • 2010 Constitution (Diverse religions) In groups of three (3), discuss among each other more examples of logrolling and implicit logrolling (5 Minutes) Topic 2.1 Logrolling Cntd • Although logrolling has the potential to account for intensity of preference, the danger remains that it will be used by skillful politicians as a means of gaining approval for programs with purely redistributive benefits. • Does logrolling ensure efficiency? Discuss Topic Two Political Parties Individuals with similar ideas on the role of government and other issues often group together to form political parties. Politicians seek elective office for a variety of reasons: power, prestige, desire to serve others, and personal financial returns after leaving office. They are influential in formulating the alternatives that are presented to voters and in dispersing information on the relative merits of alternative measures and candidates on the agenda for approval. Examples… Topic Two Special Interest Groups • Special-interest groups are organizations that seek to increase government expenditures that benefit their constituents. • They differ from political parties in that their leaders do not actually run for political office. • They do, however, seek to put pressure on political candidates, bureaucrats, and ultimately on voters to support issues that benefit the members of their groups • Special-interest groups exist to promote policies favorable to workers, particular industries, regions, racial minorities, ethnic groups, environmental preservation, and taxpayers in general.
