Public Choice Theory For The Provision of Social Goods Determination of Social Good Through Voting Process

Public Choice Theory for the Provision of Social
Goods
Determination of social good through voting process
BITS Pilani
Pilani Campus
Political Economy: Introduction
The field of political economy (sometimes

Public Choice
called the field of public choice) uses the

methods of economics to study how government
works.
@ Grubder, J. Public Finance and Policy: Musgrave and

Musgrave-Public Finance: Theory and Policy
Behavioristic theory of public expenditure

Anthony Downs- An economic Theory of Democracy
In a democratic country, the ruling party formulates policy to win an election rather
than winning an election to formulate policy.
Public Choice
Political parties are guided by self-interest axioms to lengthen rule, to maximize

power, to maximize wealth, to win more influence and finally seek affluence.
Citizen voters will cast their vote in favor of that political party that will declare the
manifesto at the time of election in line with the preference of the voters, in other
words the voters are guided by the principle of self-interest axioms.
According to Downs, political party will try to maximize the votes to win elections
by pursuing a budgetary policy.
Politics also influences the amount of taxes you pay and how the burden of
financing government programs is distributed among citizens.
In democratic nations, citizens have the opportunity to vote on issues or for
candidates who take positions on those issues.
Public Choice
The outcome of the process depends on voting and the behavior of a host of
characters including politicians, elected officials, special-interest groups, and
bureaucrats.
Voting models attempt to translate individual preferences in terms of Public Choice.
A political equilibrium is an agreement on the level of production of one or more
public goods given the specified rule for making the collective choice and the
distribution of tax shares among individuals.

Voting Rules:
1. Majority rule
2. Plurality rule
3. Point voting
Public Choice
4. Borda count
5. Logrolling
Check you class notes for details

Important Axioms
Dominance: If one choice is preferred by all voters, the aggregation mechanism must
be such that this choice is made by society; that is, if every individual prefers building
a statue to building a park, the aggregation mechanism must yield a decision to build
a statue.
Public Choice
Transitivity: Choices must satisfy the mathematical property of transitivity; that is, if
a large statue is preferred to a medium-size statue, and a medium-size statue is
preferred to a small statue, then a large statue must be preferred to a small statue.
Without this property, we can get into cyclical voting.

Independence of irrelevant alternatives. The outcome should be independent of
irrelevant alternatives; that is, if we have to choose between a swimming pool and a
tennis court, the outcome should not depend on whether there is a third alternative,
such as a new library.
Public Choice
Paretian condition- Pareto optimal condition means welfare of one individual cant
be increased without reducing the welfare of other individual, however, if the optimal
condition is nor reached, then there is the scope for improving the welfare of one
individual without reducing the welfare of the other individual. This situation known
as Paretian condition.
Voting System
Order of the preference of the voters (3 kind of projects)
I II III
A 30 20 10
B 10 20 30
C 20 30 10
Project choice
Electoral Tally sheet
Public Choice
10 vs 20 20 vs 30 10 vs 30
A
B
C
Total 1 2 2 1 1 2
20 wins over 10 20 wins over 30 30 wins over 10
Size of the budget
I II III
A 1 2 3
B 3 2 1
C 2 1 3
6 5 7 When preference are single peaked
then only as per the majority rule
Musgrave-Public Finance: Theory and Policy the decision is possible
Median Voter Theory
With single-peaked preferences, voting works well.

• Median Voter Theorem: Majority voting will yield the outcome preferred by
the median voter if preferences are single-peaked.
Public Choice
• Median voter: The voter whose tastes are in the middle of the set of voters.
• The government need find only the one voter whose preferences for the public
good are right in the middle of the distribution of social preferences and
implement the level of public goods preferred by that voter.

• If the preference pattern of one of the individuals is non-single peaked, it
gives rise to a non-single peaked preference pattern for the group.
• In this scenario due to contradiction on the group choice between majority
rule and transitivity rule group choice cant be derived.
• In other words there is no possibility of any median voter.
Public Choice
• In case of a non-single-peaked preference pattern even the minority can

withdraw the will of the majority.

Equity in Distribution Plurality Voting




Plurality Voting
➢ Comparing Majority and the Plurality rule in this case it can be stated
that the majority rule is independent of the irrelevant alternative (i.e.
‘b’) whereas plurality rule is not.
➢ Referring to Arrow’s “Rational Collective Choice” it is seen that
Equity in Distribution
plurality rule violates the axiom of ‘independence of irrelevant

alternative’.
➢ Hence plurality rule cannot be considered for the derivation of group
choice. However, the supporters of plurality rule do not agree to it.

Logrolling
Logrolling means vote trading. Individual X supports the preference of Y in one

case provided that Y supports the preference of X in the other case. It is illustrated in
the following example.
Suppose the Government is making expenditure in the Education sector and also in
the Health sector. Education is explained by the size of school (S) and Health is
explained by the size of Hospital (H).
Public Choice
Let H1, H2, H3 represent low size, medium size and big size of the hospital. The
preference patterns of individual X, Y and Z is given as follows:

Applying majority rule the group choice will be .
Similarly, for school sizes, the preferences are as follows:

Applying majority rule the group choice will be
It is obvious that following majority rule the final outcome will be in the group choice, i.e. point M in
Figure 6.3. Point X, Y and Z represent best position for individuals X, Y ad Z respectively on the basis
Public Choice
of their preferences for (H and S).

XX,YY,ZZ are indifference contours for individual X,
Y and Z respectively.
The closer the contour XX′ is towards the point X in

Figure 6.3 the higher will be the level of welfare
enjoyed by individual X. Similarly, are for
individuals Y and Z.
Public Choice
Suppose there is vote trading between individual X

and Y.
Y supports the preference of X for H and in

exchange X supports the preference of Y for S.
This gives the group choice finally according to the

majority rule and considered to rest on point ‘e’ in
Figure.
If again there is logrolling between
individual Z and Y, Z supports the preference
of Y for S and in exchange Y supports the
preference of Z for H.
This leads to final group choice and
considered to rest on point ‘f’ in figure.
Public Choice
H S, 33 Point ‘e’ and ‘f’ are different and it

leads towards cyclic voting for H.
Therefore in this case logrolling fails to

derive the group choice.
For the success of logrolling an individual
has to go for vote trading only with another
individual, not with more than one
individual simultaneously.

Arrows Impossibility Theorem
Arrows Impossibility Theorem- Social choice Paradox
Answers a very basic question in the theory of

Public Choice
collective decision-making.
Individual preferences will be translated in

terms of collective choice, and that need to be
rational.
However, it isn’t easy to attend all the choice

together.
• There is no social welfare function that satisfies a certain set of very
natural principles of group decision-making methods.
Public Choice

Axioms
• Unrestricted Domain
• Transitivity
Public Choice
• Independence of irrelevant alternatives

• Paretian condition
• Non-Dictatorship
All the axioms have to be fulfilled for rational collective choice.

Public Choice Arrows Impossibility Theorem



Arrow’s Impossibility Theorem
Theorem (Arrow’s Impossibility Theorem)

Public Choice
• Assume that V is a voting system with more than two alternatives

which satisfies the Pareto condition and is independent of irrelevant
alternatives. Then V is a dictatorship.

➢K J Arrow has defined 5 axioms to derive collective choice which will
be rational.
➢Individual preferences will be translated in terms of collective choice
and the collective choice need to be rational otherwise the collective
choice is meaningless.
Public Choice
➢However, Arrow has proved that all the 5 axioms are not fulfilled
simultaneously.
➢When the first four first axioms are fulfilled the individual become a
dictator and violates the fifth axiom as non-dictatorship.
➢Hence, it is impossible to derive the collective choice and impossibility
theorem.



The above formulation proves that if individual X is decisive on any pair it follows
that he is also decisive on all other pairs based on unrestricted domain.
In other words X becomes the dictator. It violates the non-dictatorship axiom.

Public Choice
It follows that when one individual is decisive on any single pair he maintains his
decisiveness on all other pairs making him a dictator.
At this stage we have to prove that for same pair there exists an almost decisive pair
containing just one individual.



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Public Choice Theory for the Provision of Social

The field of political economy (sometimes

called the field of public choice) uses the

@ Grubder, J. Public Finance and Policy: Musgrave and

Behavioristic theory of public expenditure

Political parties are guided by self-interest axioms to lengthen rule, to maximize

@ Grubder, J. Public Finance and Policy: Musgrave and

Check you class notes for details

@ Grubder, J. Public Finance and Policy: Musgrave and

With single-peaked preferences, voting works well.

@ Grubder, J. Public Finance and Policy: Musgrave and

• In case of a non-single-peaked preference pattern even the minority can

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

plurality rule violates the axiom of ‘independence of irrelevant

@ Grubder, J. Public Finance and Policy: Musgrave and

Logrolling means vote trading. Individual X supports the preference of Y in one

@ Grubder, J. Public Finance and Policy: Musgrave and

Similarly, for school sizes, the preferences are as follows:

of their preferences for (H and S).

@ Grubder, J. Public Finance and Policy: Musgrave and

The closer the contour XX′ is towards the point X in

Suppose there is vote trading between individual X

Y supports the preference of X for H and in

This gives the group choice finally according to the

H S, 33 Point ‘e’ and ‘f’ are different and it

Therefore in this case logrolling fails to

@ Grubder, J. Public Finance and Policy: Musgrave and

Answers a very basic question in the theory of

Individual preferences will be translated in

However, it isn’t easy to attend all the choice

@ Grubder, J. Public Finance and Policy: Musgrave and

• Independence of irrelevant alternatives

All the axioms have to be fulfilled for rational collective choice.

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

Theorem (Arrow’s Impossibility Theorem)

• Assume that V is a voting system with more than two alternatives

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

In other words X becomes the dictator. It violates the non-dictatorship axiom.

@ Grubder, J. Public Finance and Policy: Musgrave and

@ Grubder, J. Public Finance and Policy: Musgrave and

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