Public Choice Theory and Economics of Taxation - Majority Voting: how much and what products should be produce? tax? finance? - reveal’s society’s preference, but not perfect. - where public choice theory show it can produce inefficiencies and inconsistencies. - Inefficient Voting Outcomes - society wants where total benefits exceeds its total cost, but majority voting does not always product at that outcome 1. Illustration: Inefficient “No” Vote a. exp. assume gov provides a public good, exp public defense, costing $900. where 3 ppl pay $300 each for tax, but only 1 person can benefit so majority will be a no. other 2 ppl only benefit $220. 2. Yes Vote a. a majority favors a public good where its total cost exceeds its total benefit. 900$ so each of the ppl will pay $300. 2 ppl will benefit 350, and will vote for it cause the tax was less costly. that 1 person will only benefit 100. this public good costs 900, but only benefits $800. b. society’s resource will be inefficiently allocated. 3. Implications a. inefficient outcome may occur as either an over or under production. b. now gov might fail to provide some public goods whose production is economically justifiable while providing other goods that are not economically warranted. c. It is easy to buy private goods, usually at a marketplace, like squid. d. It is HARD to buy public goods, like national defense, when it is not favored by the majority. in exp no vote. 4. interest groups a. people who like public goods can advertise by mailing, persuasions, and band together. can say national defense is much more important than what they lose in tax money. b. popular in democratic parties 5. political logrolling a. can trade votes, i'll vote yes for this public defense one, but you'll have to vote yes for the one i want, public roads. b. without this logrolling, both public goods would have been rejected. c. common in state legislatures and congress. d. can either increase or decrease economic efficiency. - Paradox of Voting - a situation in which society may not be able to rank its preferences consistently through paired-choice majority voting. - consequence: gov find it hard to provide the correct public goods by acting in accordance with majority voting. - Median-Voter Model - in majority voting, the median voter model suggests that, under majority rule and consistent voting preferences, the median voter will in a sense determine the outcome of the election. - extreme voters on each side of an issue prefer the median choice rather than the other extreme position. - exp, political candidates take one set of positions to win the nomination of their political parties, they appeal to the median voter within the party to get the nomination. then they shift to the political center against opponents. - 2 implications 1. many ppl will be unhappy by the extent of government involvement with economy. size of gov is determined by the median preference. 2. people may vote by moving into political jurisdictions where the median voter’s preference are closer to their own. - Government Failure. - where public choice theory suggests that inherent shortcomings within the public sector can produce inefficient outcomes - these shortcomings can gause goc. failure - inefficiency due to certain characteristics of the public sector. 1. Special interests and rent seeking a. gap between sound economics and good politics b. sound economics: calls for the public sector to pursue various programs as long as marginal benefits exceed marginal costs c. good politics politicians support programs and policies that will max their chance of getting elected and staying in office. d. Special interests effect: any outcome of the political process whereby a small number of people obtain a government program or policy that gives them large gains at the expense of a much greater number of persons who individually suffer small losses. e. pork-barrel politics : means of securing a government project that yields benefits mainly to a single political district and its political representative. i. they want to support the “pork” aka public goods in local area’s. ii. there is logrolling to secure that pork. iii. - - help from special interest groups to support smaller group cause they are willing to help finance the right minded politicians that can “bring home the pork” iv. result: politicians support special interest programs and projects that cannot be justified on economic grounds. 2. Rent Seeking Behavior: - is the appeal to government for special benefits at taxpayers or someone else’s expense. - corporations, labor unions, others support government policies that result in rent -- higher profit or income than would occur under competitive market conditions. gov give rent through laws, rules, hiring, etc - exp of rent providing legislations - tariffs on foreign products that limit competition and raise prices to consumers - tax breaks that benefit specific corporations - gov. construction projects that create union jobs, but cost is > - occupational licensing that goes beyond what is needed to protect consumers. - large subsidies to farmers by taxpayers. - none justified by economic efficiency. 3. Clear Benefits, Hidden Costs politicians don’t always vote for the public wants, but favor programs that have immediate and clear cut benefits with vague and deferred costs lead to rejecting economically justifiable programs and accept programs that are economically irrational. 4. limited and bundled choice political process forces ppl and their elected representatives to be less selective in choosing public goods and services than they are in choosing private ones. take the bad with the good 5. Bureaucracy and inefficiency public agencies are less efficient than private businesses. cause market system creates incentives and pressures for internal efficiency that are absent in public sector.
