Week 2 Public choice theory.pptx

Public Choice (Chap 6) Associate Prof. J. Marire Economics & Economic History Rhodes University Office E17 Email: [email protected] Learning Outcomes Be able to discuss the relevance of the Rawlsian Justice in Fairness theory to South Africa’s constitutional political economy Be able to disc...

Public Choice (Chap 6) Associate Prof. J. Marire Economics & Economic History Rhodes University Office E17 Email: [email protected] Learning Outcomes Be able to discuss the relevance of the Rawlsian Justice in Fairness theory to South Africa’s constitutional political economy Be able to discuss and evaluate the Median Voter theorem Be able to explain the Impossibility Theorem and discuss its implications Be able to explain Logrolling (Vote Trading) and discuss whether it can improve the results of Majority Voting systems Be able to discuss and evaluate the Optimal Voting Rule theory Discuss the self-interest maximization behaviour of politicians and bureaucrats and its impact on majority voting systems Explain the origins and effects of rent-seeking behaviour Social Choice and Political Allocation of Resources Mixed economies have private and public sectors In private markets, the invisible hand coordinates resource allocation In the public sector, the ballot determines resource allocation, and the tax rate is the price for goods and services produced So, how are individual choices transformed into social choices made? Unanimity Rule, Simple Majority Voting Rule, Optimal Voting Rule, Logrolling/Vote Trading We look at each in turn. Rawlsian Unanimity Rule (RUR) All choices are made based on 100% agreement RUR targets the poorest of the poor Why? It guarantees that collective welfare improves This strategy is called a MaxMin (maximise the minimum) strategy. Min(Ua, Ub), if Ua < Ub target Ua The RUR is the only choice rule that is Pareto Efficient Examples of policies that maximise the minimum? However, decision-making costs are too high minority can veto a majority Ordinary Majority Voting Rule (MVR) - 1 In a direct democracy, a simple majority voting rule requires a party or a policy proposal to garner 50% + 1 vote In representative democracies, MPs vote for policy choices on our behalf The Median Voter Theorem explain what happens in Ordinary Majority Voting Systems Median Voter Theorem (MVT) defined: Assuming no extreme preferences, the median voter’s preferences under a majority voting system will minimise collective welfare loss. Ordinary Majority Voting Rule (MVR) - 2 MVT assumes that politicians maximise votes Yet, https://www.youtube.com/watch?v=9obm__ -OGdI – Lucky Dube: self-interest major motivation some politicians pursue public interest others pursue a personal vision for a better future others pursue special interests Above all, each policy issue has its own median voter. No single median voter for all proposals. In what ways is the MVR better than RUR? has low decision-making costs Less  Median Voter Theorem (MVT) – Illustration with NHI Voter Financing Vehicle % of votes Sipho NHI funded by current VAT rate of 5/5 or 100% 15% Alex NHI funded by VAT rate of 16,5% 4/5 or 80% Lizzy NHI funded by VAT rate of 17,5% 3/5 or 60% Prettie NHI funded by VAT rate of 18,5% 2/5 or 40% Sanele NHI funded by VAT rate of 21% 1/5 or 20% The National Health Insurance Act was enacted in 2024 but questions remain about how to fund it. Who is the median voter here? What financing vehicle do they prefer? Clear that a VAT rate of 17.5% will gain support from both halves of the voter distribution relative to 18,5% and 21%  Social Choice of Coalition Government/GNU 90 80 So, who did people want 70 to represent them to 60 decide policy choices? 50 Survey based on 1000 40 citizens drawn from a cross-section of party % of poll 30 voters and weighted by 20 census population 10 demographic 0 characteristics PC M K FF FF ov t FF er ow C- E E E th n NB: the data may be _M C- K- G K- O tk A AN AN M i ty M ' -D C- r A- on ideologically disputable C AN i no D D AN C M – source Brenhurst AN Foundation Preferred coalition nationally ANC voters' preferred coalition DA voters' preferred coalition MK voters' preferred coalition  Arrow’s Impossibility Theorem (AIT) - 1 AIT states that no social choice rule produces consistent results Arrow’s assumptions: Every voter is rational and has single-peaked preferences. Hence, collective preferences are transitive Independence of irrelevant alternatives: if the choice is between a coalition of ANC-DA and ANC-MK, introducing PA-EFF does not alter the choice Pareto principle holds i.e. if, for Susan, ANC-DA > ANC-MK, and for Thando ANC-DA = ANC-MK, then overall ANC-DA > ANC-MK, where “> means preferred to” and “= means indifferent” No barriers to voting for those who want to  Arrow’s Impossibility Theorem (AIT) – 2 – voting in pairs NHI – national health insurance; FHE – free higher education; UBI – universal basic income Malema: NHI > FHE > UBI Zuma: FHE > UBI > NHI Ramaphosa: NHI> UBI > FHE We have 3 majorities below – a Voting Paradox, intransitivity Pairwise Who supports it? votes NHI>FHE Malema and Ramaphosa NHI > UBI Malema and Ramaphosa FHE > UBI Malema and Zuma FHE > NHI Zuma  Arrow’s Impossibility Theorem (AIT) – 3 – voting in pairs MB, tax/unit TB Tax rate (MC) TB t MB* Q* MB Q* Level of public good Level of public good MB* arises from multiple–peaked preferences (intransitive preferences). We want MB (transitive preferences). What are the implications of AIT? The majority rule does not necessarily produce results that find favour with the majority; hence, a voting paradox Intensity of Preferences: Logrolling Simple majority rule fails to account for the intensity of preferences A party/policy can be voted for with a weak majority where the voters have low intensity of preference, but society will be collectively worse off as a result. Ways to account for preference intensity: Weighting e.g. each voter has 100 points to distribute to options. But weighting is normative. Vote trading/ logrolling between one majority party and a minority (e.g. ANC and EFF), but the minority must not keep raising minority issues on every policy issue Vote trading/logrolling among minority parties if they can make a majority via a coalition e.g. MK + EFF + PA + DA against ANC  Optimal Voting Rule (OVR) - Tullock & Buchanan - 1 Is there a rule that can outperform dictatorship, majority rule and unanimity rule? Tullock and Buchanan put forward the optimal voting rule. Two types of costs to consider: External costs of decisions Decision-making costs Optimal voting External costs – refer to the negative rule - 2 externalities of a policy proposal on those opposed to it. The higher the external costs, the higher the requirement for Costs consensus building (approaching unanimity) Decision-making costs – refer to time, To t al people and money costs involved in co consulting and building consensus and st Ex s compromises. s te st co rn Clearly, the higher the external costs al ng (high curve), the larger will be M* and co i ak s the higher the decision-making costs (high m ts n curve), the lower the M*. io is ec Why does M* behave that way? D Can you think of topical policies with high 0 50 M* 100 external costs? Proportion of votes Can you think of policy proposals that might have low decision-making costs? Dictatorship Unanimity Government Failure - 1 Just as markets fail, governments fail too. But why do governments fail? Corruption, state capture, bureaucratic capture, etc, are examples of government failure Behaviour of politicians Behaviour of bureaucrats Joint-elite behaviour (i.e. politicians in cahoots with bureaucrats) Recall that under majority voting: Voters are RATIONALLY ignorant because they lack incentives to obtain information about the costs and benefits of the manifesto promises Politicians are elected based on a package of policy promises that might not garner an overall majority. Hence, there are special interests Government Failure – 2 - Politicians Politicians are vote maximisers Since various policy promises they make in manifestos target different special interests e.g. Workers, Students, the Poor, Capital, alliance partners etc. This means that politicians can maximise votes by appealing to special interests because each interest group is weakly opposed to what the other groups want, and knows that it can have its way by weakly supporting that which others want. Politicians simply misrepresent the true cost of their proposals, leading to fiscal illusion This is vote-trading (not among political parties) but among voters, and we call this implicit logrolling Implications: Implicit logrolling fostered by the vote-maximising behaviour of politicians results in proliferation of special interest legislation and policies Result: oversupply of public goods, lots of unpopular public goods too and significant economic waste Government Failure – 3 – Politicians, example Policy Strongly Weakly opposed Formation of voter coalition propo favoured by leading to implicit logrolling can sal by easily arise since none of the NHI 45% of 55% of voters special interests is a majority voters The result is the supply of FHE 30% of 70% of voters voters unpopular public goods UBI 40% of 60% of voters Economic waste as the burden voters for financing the provision falls on all but benefits a small group Oversupply of public goods Politicians are always at it: Living like rock stars https://www.da.org.z Ministerial Perks Rands a/2023/05/ministerial Cumulative since Average/ -handbook-costs-near Aspect 2019 year ly-r1-billion-per-year- 2 048 512 000 da-introduces-cut-ca VIP protection 000 000 000 binet-perks-bill Salaries for support staff 000 000 1 548 387 000 000 Dr Leon Schreiber MP 81 20 277 International travel 108 884 221 https://www.biznews. 25 6 231 Vehicles 287 064 766 com/thought-leaders/ Alternative electricity, water & 58 14 500 2023/03/14/living-roc security 000 000 000 k-stars-sas-governme 3 760 940 008 nt-officials-enjoy-lavi Total 395 948 987 Government Failure – 4 - Bureaucratic Behaviour Bureaucrats (civil service) are utility-maximising agents too They want to get generous perks, so they maximise the budget and the size of the bureau A principal-agent problem underpins this behaviour – the bureaucrats (the agents) have goals different from the principal’s (citizens as represented by politicians). Bureaucrats oversupply public goods as part of their rent-seeking behaviour. They overshoot the efficient level of supply. How? Using more input to produce the same output that could have been produced with fewer inputs (X-inefficiency) Overpricing of activities through the tender process (tenderpreneurship) Benefits, TSC costs MSB TSB Oversupply of public goods by bureaucrats Why are the total social benefit (TSB) MSC and total social cost (TSC) curves shaped the way they are? Efficient level of output is Q0. Why? Q0 Q1 Qty of public goods At Q0, Benefit = 0AEQ0 Cost = 0BEQ0 A G MSC Welfare gain = ABE At Q1, E Benefit = 0AFQ1 E Cost = 0BGQ1 B Welfare loss = EFG, rents going to F bureaucrats at the expense of society MSB 0 Q0 Q1 Qty of public goods Price gorging at Eskom (X- inefficiency) Kusile Coal Power Station – over R4 billion overpayment plus massive budget overruns and senior Eskom officials fingered in rent-seeking Eskom paying R238 000 for a wooden mop Transnet locomotive acquisition budgeted at R38 billion, with an in-built contingency of R2.4 billion. Opaque procurement made it possible for rent-seeking and inflating tender prices Transnet executives draining over R87 million in salary and benefits for running Transnet at a loss of nearly R6 billion in 2023 Transnet Executives Pay: Utility- maximising Despite making a loss of R5,7 billion, Transnet executives have the lion’s share in salary and perks https:// dailyinvesto r.com/ south- africa/ 29832/ transnet- execs-paid- Conclusions Please read the section on rent-seeking and corruption Public choice theory gives us tools that we can use to examine the economic behaviour of government and the motivation for certain policies, who benefits from the policies, who bears the cost etc. I can give you a scenario in the exam to apply these concepts. It might be a brief text (a paragraph), a data table, a quotation, or an excerpt from a report like the Zondo Commission, Nugent Commission, any report in the public domain, or a newspaper article. Please avoid memorising. Always understand why we say what we say theoretically and empirically.