Economics Chapter 17 Study Notes

Economics Chapter 17: Public Choice - Economic Theory Applied to Politics

Introduction

  • Public Choice: The branch of economics that deals with the application of economic principles and tools to public sector decision making.

In This Lecture

  • Politicians and the Middle: The Median Voter Model
  • Voting and Rational Ignorance
  • More About Voting
  • Special Interest Groups
  • Bureaucracy

Median Voter Model

  • The Median Voter Model suggests that candidates in a two-person political race will gravitate toward the preferences of the median voter.
    • The median voter is defined as the individual whose preferences are at the center of the political spectrum.
    • Candidates in a two-person race adjust their platforms to match these preferences to maximize their chances of winning.

The Move Toward the Middle

  • Political candidates tend to position themselves towards the center of the political spectrum to gain votes:
    • Starting with a scenario where the Republican candidate receives more votes than the Democrat, the Democrat will adjust their stance inward towards the center to be more competitive.
    • The Republican may respond by also moving towards the middle, resulting in both candidates converging in their political positions over time.

Politicians and the Middle: Further Explanation

  • Candidates' strategies:
    • Candidates label opponents as being “too far right” or “too far left”, to draw a contrast and appeal to the median voter.
    • During campaigns, candidates prefer general terms over specific details to maintain broader appeal.
    • Conducting polls to gauge public sentiment and adjust their positions accordingly is a common practice.

Voting and Rational Ignorance

  • There are both costs and benefits involved in the decision to vote:
    • Many potential voters choose not to participate because the personal cost of voting (time, effort) outweighs the perceived benefit, particularly the probability of their vote determining the outcome.

Rational Ignorance

  • Voters often remain uninformed about political and government issues:
    • This choice stems from the costs of acquiring information being higher than the benefits of such knowledge.
    • Voters make a deliberate decision to be rationally ignorant rather than informed.

Self-test Questions

Self-test 1

  • If a politician does not speak in general terms or adjust their political stance toward the middle, does it invalidate the median voter model?
    • Answer: No, the model predicts that candidates who adjust their strategies in this manner have a higher chance of winning, not that all must behave this way.

Self-test 2

  • Why do politicians avoid specifics despite voters often demanding detailed policy proposals?
    • Answer: Being specific can falsely label politicians as extreme, which is detrimental to their chances of winning. Voters may desire detail, but it may not align with politicians' interests.

Self-test 3

  • Can bad weather affect voter turnout? Explain.
    • Answer: Yes. Bad weather increases the costs associated with voting (e.g., traveling, waiting), thus lowering voter turnout, all else being equal.

More About Voting

  • In a simple majority vote where several options are available, the result often reflects the preference of the median voter rather than the majority's overall preference.
    • Examples suggest that outcomes can differ significantly based on the structure of voting systems and tax allocations.

Special Interest Groups

  • Special interest groups are subsets of the population that hold intense preferences for specific government services or policies.
    • These groups often influence public policy in ways that do not reflect the general public’s interests.

Information and Lobbying Efforts

  • General voters are typically less informed about issues than special interest group members.
    • This disparity enables informed groups to exert greater influence on politicians.
  • The Lobbying Disclosure Act, signed into law by President Clinton on December 19, 1995, aimed to regulate lobbying activities.

Logrolling

  • Logrolling: The practice of exchanging votes among legislators to gain support for legislation.
    • Congressional districts can act as special interest groups for specific issues, participating in logrolling to achieve favorable policies.

Rent Seeking

  • Rent: Payment above the opportunity cost.
  • Rent seeking: The allocation of resources to capture a transfer of wealth rather than to produce goods and services.
    • From a societal perspective, resources spent on rent seeking are seen as wasted, reducing overall wealth in society.

Rent Seeking Example

  • Example Scenario:
    • Brown and Smith represent a society with a total income of $10,000.
    • Smith attempts to lobby for legislation to transfer resources from Brown to him, viewed as rent seeking.
    • The collective income of the society may decrease as a result of such actions, leading to a reduction in total welfare.

Self-test Questions (Rent Seeking)

Self-test 1

  • Why are farmers often better informed about agricultural policies than average consumers?
    • Answer: Farmers, being directly affected by agricultural policies, have more at stake, leading them to be more informed than consumers who are only indirectly affected.

Self-test 2

  • Is special interest legislation more likely to pass with a smaller or larger group of those impacted?
    • Answer: Legislation is more likely to pass when costs are dispersed over a large group (e.g., 10 million vs. 10,000) because individual resistance is less likely when costs are small.

Self-test 3

  • Provide an example of public interest rhetoric from special interest groups.
    • Examples: Claims by teachers that increased education funding enhances national competitiveness, car manufacturers arguing tariffs save jobs, and farmers asserting subsidies preserve traditional farming.

Self-test 4

  • Why is rent-seeking behavior considered socially wasteful?
    • Answer: Resources used in rent seeking could be devoted to productive activities rather than attempts to transfer wealth.

Government Bureaucracy

Overview

  • Government bureaus receive funding from legislatives; their future funding often depends on current spending.
  • They are not profit maximizers and do not operate under competitive conditions. Examples include departments that provide essential public services with little to no competition (e.g., DMV).

Government Bureaucrats

  • Government bureaucrats: Unelected officials tasked with executing laws or programs. Public choice economists assert they behave in predictable ways based on their funding structures rather than malice.

Behavior of Bureaucracies

  • Bureaucracies are motivated to spend their allocated budgets fully, as unspent funds may be reduced in future budgets.
    • Cost controls are less stringent because there is no profit motive.
    • Bureaucrats may focus on expanding their programs rather than customer satisfaction due to lack of competition.

Examples of Voting for Nonexcludable Public Goods

Example 1: Voting for a Nonexcludable Public Good

  • A community of seven individuals seeks to produce a nonexcludable public good, X.
    • Voting preferences vary significantly among individuals, affecting the outcome of majority votes.

Voting Dynamics

  • Using majority voting methods, a preferred outcome for all is difficult to achieve. In one scenario, the most voted outcome matches only one individual's preference (the median voter).

Voting and Efficiency

  • For efficient voting, marginal costs must align with marginal benefits:
    • The total social costs and benefits must equate to identify the optimal provision level.
    • Each individual's voting behavior heavily depends on the tax burden associated with their vote.