and a basis for allocating among consumers the goods that are produced.
We often
7 PUBLIC CHOICE
Unlike expenditures on conventional private goods, which are determined through
the price system, expenditures on public goods are determined through a political
process. This chapter examines some models of that political process, bringing us
to the border between political science and economics.
FOCUS QUESTIONS
1.In what ways does collective decision making, such as determining the
level of public goods, differ from standard decision making within a
household? What is the problem of eliciting preferences? When individuals
differ in what they want, say, about the level of expenditures on a public
good, how are those differences resolved? What is meant by the problem
of “aggregating preferences”?
2. Why may there not be a well-defined outcome when majority voting is
used to resolve differences in views? Is there any voting procedure that
yields a well-defined outcome in all situations? When there is a well-
defined outcome,
is it necessarily efficient?
3. What are alternative ways for determining the level of public goods
expenditures? Are there ways that ensure an efficient level of expenditures
on
public goods?
4. What are some of the ways in which politics affects the outcomes of
public decision making about resource allocation?
PUBLIC MECHANISMS FOR ALLOCATING RESOURCES
Chapter 3 explained how the market economy depends on the price
system to arrive at efficient resource allocations in the production of private goods.
The price system provides incentives for firms to produce goods that are valued
speak of the important role prices play in conveying information, from consumers
to producers concerning the value they attach to different commodities, and
between producers and from producers to consumers concerning the costs of
production and the scarcity of these commodities.
Equilibrium in private markets is determined at the intersection of the
demand curve and the supply curve. When, for one reason or another, the demand
for a commodity increases, its demand curve shifts up, the price rises, and this
induces firms to produce more. Thus, the price system conveys information about a
change in individuals’ tastes to firms. Similarly, when, for one reason or another, a
commodity becomes less costly to produce, its supply curve will shift down, the
price will fall, and individuals will be induced to shift their consumption toward the
now-cheaper commodity.
Again, the price system has conveyed information about the change in
technology from firms to consumers. Indeed, one of the central results of modern
welfare economics, as was pointed out in Chapter 3, is that in a competitive
economy, the resulting resource allocations are efficient. Decisions about resource
allocations in the public sector are made in quite a different manner. Individuals
vote for elected representatives; these elected representatives, in turn, vote for a
public budget; and the money itself is spent by a variety of administrative agencies.
Thus, there is a major difference between how an individual decides to spend his or
her own money and how, for example, Congress decides to spend the public’s
money. The vote of a member of Congress is supposed to reflect the views of
constituents, not just the representative’s own views. In deciding how to vote,
members of Congress face two problems: first, they must ascertain the views of
their constituents, and second, because these views are likely to diff er, they must
decide how much weight to assign to various positions.
THE PROBLEM OF PREFERENCE REVELATION
Individuals may express their views about the desirability of one private
good versus another by a simple action—by buying the good or not—but there is
no comparably effective way that individuals can express their views about the
desirability of one public good versus another. Elections of public officials convey
only limited information about voters’ attitudes toward specific public goods; at
best, they convey a general notion that voters prefer more or less government
spending. Even if individuals were asked directly about their preferences, would
they truthfully and meaningfully reveal them? In recent years, politicians have
increasingly turned to polls to ascertain voters’ preferences, and although they
have found the polls to be useful, they have come to treat the results with extreme
caution. For instance, in today’s environment of exploding government deficits,
polls consistently show strong sentiment toward reducing the deficit.
However, no consistent picture emerges concerning the trade-off s: some
polls suggest that voters would be willing to pay higher taxes or accept expenditure
cuts to reduce the deficit, but other polls (confirmed to some extent by voting
patterns) suggest otherwise. Although in polls voters consistently say they believe
that the government should spend less on assistance to foreign countries, when
asked how much should be spent, they give a number considerably in excess of
what the United States is currently spending. Unless individuals are faced with
concrete trade-off s, under which they actually have to give up something to get
more, say, of another good, it is difficult to get them to think hard about their
choices. In addition, there are special problems in inducing individuals to reveal
truthfully their preferences concerning public goods. If what they have to pay does
not depend on their answer, then there is a tendency to ask for more of the good:
one would normally like more public goods as long as one does not have to pay for
them. However, if what an individual says affects how much he or she has to pay,
there is an incentive for the individual to pretend that he or she enjoys the good
much less than he or she really does—the individual knows that the answer will
have a negligible effect on the total amount supplied, and he or she would like to
be a free rider.
In private decisions, the decision maker knows his or her own preferences. In public
decisions, however, the decision maker must ascertain the preferences of those on
whose behalf he or she is making the decision. This is the first important difference
between public and private resource allocations.
INDIVIDUAL PREFERENCES FOR PUBLIC GOODS
Collective decision making is difficult because different individuals have
different views, for instance, about how much should be spent on public goods.
They differ for three reasons. Sometimes there are simply differences in tastes. Just
as some individuals prefer chocolate ice cream and others vanilla, some people
prefer public parks and education, whereas others prefer private goods, such as
video games and cars. This book will not have much to say about these matters of
tastes. The other two sources of differences are incomes and taxes. Richer
individuals have higher incomes, so normally they prefer to spend more on all
goods, both public and private. When the government spends more on public
goods, however, richer individuals often have to pay a relatively large share of the
additional cost. In the case of private goods, rich and poor individuals typically pay
the same price; with public goods, in effect, richer individuals typically have to pay
a higher price. The tax price is the additional amount an individual must pay when
government expenditures increase by one dollar. The tax price multiplied by total
government expenditures equals the individual’s tax payment. A higher tax price by
itself means that richer individuals would want a lower level of expenditures on
public goods. With an income effect leading to a higher desired demand, however,
and a price effect leading to a lower desired demand, the net effect is ambiguous.
To observe these eff ects, consider fi rst a situation in which there are Npeople and
each must pay the same amount, regardless of income. Under this system of
uniform taxation, the tax price is just 1/N and the tax payment is G/N.2
With proportional taxation, everyone pays the same percentage of income. The tax
price can be easily calculated. If Y is average income, N Y is total income; if t is the
tax rate, then tN Y is total government revenue. This must equal government
expenditures: