Public Choice Theory

The government produces public goods and pays for them through taxation. How does the government determine what public goods to produce and how much? How much should people be taxed? Most people believe that a government should provide what people want at the lowest possible cost, since that would provide the highest benefit-to-tax ratio. However, whether voting achieves that goal depends on how the voting is conducted.

Public choice theory, also known as political economics, is the study of the economics of political behavior — how economic incentives and consequences affect voters, legislators, and bureaucrats. The democratic process is one in which, supposedly, the preferences of the public are expressed through elected representatives.

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 Public choice theory illustrates some scenarios where a majority vote would actually lower the benefit-to-tax ratio or where projects may be selected that have a higher cost over benefits for the economy as a whole. These inefficient outcomes are usually the result of the fact that people vote in their own interest, so even if a project yields a great benefit to a certain group but a small expense to the rest of the people, they will probably vote against it anyway. For instance, according to recent polls, most people are against the Patient Protection and Affordable Care Act (also known as Obamacare), which is a program to provide health insurance for most of the uninsured. Although the uninsured would greatly benefit from the national health insurance, most people were against it, according to polls, because they already have health insurance, and they were afraid of changing the status quo for fear that they might lose what they have or that they might be taxed more.

Of course, the benefit of most government projects cannot be ascertained accurately beforehand nor would individual taxpayers know of the exact cost to them, so public choice theory is really an abstract scenario, but it can show how allowing the public to choose may not yield the best results for the economy as a whole.

Public goods differ from private goods in that the exact benefit and cost to each individual is unknown, while the benefit and cost of a private good to an individual is certainly knowable to the individual.

Consider 3 taxpayers Wilma, George, and Peter. If a project would provide $1000 worth of value to Wilma, $500 to George, $400 to Peter, and this benefit can be obtained by taxing each $500, then the benefit to each of the 3 taxpayers would be $1900. But the tax would only be $1500, so the net benefit to the 3 taxpayers would be $400. However, since people generally vote in their own interest, Peter and George probably would not vote for the tax to provide the benefit, since they would not be the main beneficiaries. Alternatively, if Peter and George would gain $600 worth of benefit from a project but Wilma gained only $100 from the project, but each would have to pay a tax of $500, then George and Peter would probably vote for the project even though it would cost Wilma more than George and Peter would benefit. Thus, the total cost to this economy would be $200 greater than the benefit.

Paradox of Voting

The paradox of voting is that when people use a paired-choice majority voting system, the priority selected may not reflect the true priorities of society, depending on the order of the voting choices.

To illustrate, consider 3 public goods: universal healthcare, job training, and national defense. In the diagram, the table lists the preferences for these 3 public goods of 3 voters: George, Peter, and Wilma. One indicates the highest preference; 3, the lowest. If the pairwise voting first compares universal health care and job training, then universal healthcare wins, but loses when compared to national defense. However, if job training and national defense are compared first, then job training wins, but loses against universal healthcare. Hence, depending on how the voting choices are presented, national defense wins in the first case, but universal healthcare wins in the 2nd case, even with the voter preferences exactly the same in both cases.

Median Voter Model

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The median voter model states that given a number of propositions, the one closest to the center, or the more moderate proposal, will be the one that is selected. For instance, suppose Wilma champions a proposal that costs $600, Peter proposes a project that costs $500, and George proposes a project that costs $400. Again, using the paired choice voting method, where voters will first vote on 2 of the projects, and then compare the winner of that vote with the remaining project. If a $600 project and the $500 project are first presented, Wilma and George will vote for their own projects. However, because Peter voted for the $400 project, he is more likely to select George's model since that cost is closer to his own. When the vote is between the $500 project and $400 project, again Wilma will vote for the $500 project, because it is closer in cost to her favored project and George will naturally vote for his favored project, while Peter will vote for his own project. Hence, the project with a middling cost is the one selected.

Although this median voter model is a simplification, it does explain why people choose moderate candidates. For instance, in the United States, both the Democrats and the Republicans have primaries, where party members tend to choose extremists from their party. Often, the candidates running in the primaries will portray themselves as being more extremist in their campaigning to satisfy the voters, since voting in the primaries is usually restricted to party affiliates. Thereafter, the winners present more moderate stances as a means to appeal to voters of the other party. Mitt Romney followed this plan to a tee in the 2012 U.S. presidential campaign, when, during the Republican primary against more conservative candidates, he asserted that he was "severely conservative", but after winning the Republican primary election, he switched back to the center to have any chance of winning against Barack Obama.

Interest Groups and Political Logrolling

Of course, the true benefits and costs of a project are largely conjectural, so naturally, opinions differ as to what the government should do. However, some people want to influence a project in spite of what the public choice might actually be or what might be in the best interest of the economy and society in general. These people often feel strongly about a particular subject, and thus, form special interest groups that lobby legislators or the executive branch in favor or against specific projects. As they say, when money talks, Congress listens.

What often happens is that legislators try to advance their own pet projects by agreeing to vote for the pet projects of other legislators, which is sometimes referred to as political logrolling or horse trading. During the early 1980s, U.S. Representative Charlie Wilson used this method to increase funding to the Afghan mujahideen so that they could more effectively resist the Soviet occupation of Afghanistan. However, logrolling generally results in higher expenditures that benefit politically connected groups at the taxpayers' expense. Logrolling would be unnecessary if politicians voted in the public's interest.