Chapter 6

Public Choice Theory

Learning outcomes

• Discuss the Rawlsian theory of justice and comment on its relevance to recent political developments in South Africa

• Explain the median voter theory and indicate its potential strengths and weaknesses

• Discuss the meaning and importance of Kenneth Arrow’s impossibility theorem

• Consider whether logrolling (or vote trading) is an efficient means of improving the outcomes of a majority voting system

• Explain the theory of ‘optimal voting rules’ and consider the question of whether it does indeed provide an ‘optimal rule’ for majority voting

• Discuss the maximising behaviour of politicians and bureaucrats, and consider the implications of such behaviour for majority voting

• Explain the origins and consequences of ‘rent-seeking’.

The unanimity rule

• Pareto-optimal outcome – collective decisions in the interests of all parties

• Positive sum game.

The unanimity-voting rule means that each member or representative group within a community must support a proposal before it becomes the

collective decision.

The Rawlsian experiment

• Normative• Free and rational persons choose principles of justice• Social contract• Justice in fairness• Veil of ignorance• Equals on the same playing field• W = Minimum(Ua, Ub)• Rawlsian welfare function.

Shortcomings of the Rawlsian experiment• Time to reach unanimous decision• Divergent nature of individual preferences• Issues• Cost of unanimity?• Bargaining• Minority right to veto.

Majority voting and the median voter

• Majority rule/majority voting• Direct democratic dispensation• Representative democracy• Advantages

– Reaching majority approval takes much less time and thus less costly

– Less likely that minority will prevent majority.

The median voter theorem: Under a majority voting system in which preferences are not extreme, it is the median voter’s preferred option that will win the day, since that is the

option that will produce a minimum welfare loss for the whole group.

The impossibility theorem

Ethical conditions• Rationality assumption

X > Y or Y > X or X = Yand:If X > Y and Y > Z, then X > Z

• Independence of irrelevant alternatives• Pareto principle

If (X > Y)z and (X = Y)b then X > Y

• Unrestricted domain• Non-dictatorship.

Majority voting and preference intensities• Intensity of preferences cannot be accounted for• Accommodation of preference intensities:

– Vote in the form of “intensity units”• Normative• Difficult to implement• Administratively costly

– Logrolling or vote trading• Can either increase or decrease ability of a majority voting

system to truly reflect the wishes of the majority.

Voter preference for size of health budget

Voter Amount (R million)

Ndlovo 50

Mary 200

Thandi 400

Johan 600

Ibrahim 800

Optimal voting rules

Two kinds of costs:• External• Decision making.

The ‘optimal’ voting majority varies in accordance with the particular public issue in question and that these optimal majorities depend on the

costs involved in the act of voting.

The cost of democratic decision-making

Government failure

• Success of intervention requires an adequate and efficient institutional framework– Legislative authority (such as parliament)– Law enforcement– The Judiciary– Tax collection or revenue services– Regulatory bodies

• Value system and behavioural norms should entrench high levels of trust between:– Consumers– Producers– Government institutions.

Politicians

• Characteristics– Voters are rationally ignorant of much of what politicians

stand for– Politicians are elected on the basis of a package of policies

• Implicit logrolling.

Coalition-forming and implicit logrollingPolicy Strongly favoured by Weakly opposed by

Relocation of Parliament

Civil servants (33.3%) Rest of electorate (66.7%)

Rugby development Rugby lovers (33.3%) Rest of electorate (66.7%)

Student loan scheme Students (33.3%) Rest of electorate (66.7%)

Bureaucratic failure

• Do not maximise profit• Do not face market tests• Principal-agent problem.

Individuals in the bureaucracy, like the rest of us, do react to different incentive schemes; they do have various preferences, and have the

capacity, will and desire to fulfil these preferences. They prefer more rather than less income, power, prestige, pleasant surroundings, and

congenial employees.

Thomas Borcherding (1977)

Bureaucratic failure

Rent-seeking and corruption

Thank you.