Public choice theory is also known as political economy
It involves the use of economic analysis to analyses various political phenomenon such as voters, party behavior and actions of the government
Political economy involves the study of non-market decision making that is application of economics to political science
The supply of public goods through political institutions require agreement on quantity of public good and means to finance.
We can define political equilibrium as an agreement on level of production one or more public goods given the specified rule for making collective choice and distribution of tax shares among individuals.
Determinants of political equilibrium
- Public voting which entails the proportion of yes vote in relation of the number of voters required for approval of the issues
- Average or marginal cost of the public good
- Information available to the voters on the cost and benefits associated with public good
- Distribution of tax shares among voters and way in which extra taxes vary with extra output of the public good
- Distribution of benefits among the voters
- Public choice in direct democracy
- Direct democracy is a term for variety of decision processes by which ordinary citizens pass laws directly without using representatives
- Voters direct cast ballot in favor of or in opposition to particular public projects.
Various voting procedures are used to decide on the public expenditure i.e. unanimity rules and majority rules.
Unanimity rules
It involves taking a vote on whether to provide an efficient quantity of public good as long as there is suitable tax system to finance it
Ideally government could provide public good through unanimous consent of its citizens i.e. by use of Lindahl pricing
Lindahl pricing is a system where individuals report their willingness to pay for each public good and the government aggregates preferences to form a measure of social benefits.
To illustrate Lindahl pricing
Assume the public good in question is fire works for two individuals Abel and Ben. First the government announces tax prices for the public good. when a tax price is arrived at point where the same individuals want the same quantity of public good, we say the government has reached Lindahl equilibrium. the government produces public good at that level and finance it by charging each individual their tax share
In this case each individual announces how much of a public good she wants at that tax price.
If the individual preferences differ the government will raise the tax for the person who wants more of the good and lowers for the person who wants less
With Lindahl pricing the government doesn’t need to know about the utility function of individuals voters, it gets voters to reveal their individual preferences by getting their willingness to pay for different levels of public goods.
Problems of Lindahl pricing
- Preference revelation problem; Individuals may be having strategically and prevent their willingness to pay is low in order for others to get the larger cost of public good or the free rider problem
- Preference knowledge problem; It is difficult for people to properly value goods they do not shop on regular basis
- Preference aggregation problem it is difficult for the government to aggregate preferences of millions of voters
- Majority voting rules
Majority rules
In unanimity rules only when individuals are unanimously in agreement the government can achieve Lindahl equilibrium.
A common mechanism used to aggregate individual votes to social decision is a majority voting.
Here individual’s policy options are put to vote and the option that receives majority votes is chose
With majority voting rule more than half of the voters must favor a measure for it to get approval
Majority does not always produce a consistent means of aggregating preferences to be consistent majority voting rule must satisfy the goals and objective
- Dominance if one choice is preferred by all voter then the aggregation mechanism be such that this choice is made by the society
- Transitive here the choice of the voter is consistent in terms of preference
- Independence of irrelevance the introduction of a third choice does not change the ranking of the first two choices
To illustrate majority voting. consider three types of voters, that is parents, elders and young couples who have to choose three levels of school spending high, medium and low spending.
| Preference ranking | Parents | Elders | Young couple |
| First | High | Low | Medium |
| Second | Medium | Medium | Low |
| Third | Low | High | High |
Assume H represent high, L represent low and M represent medium
For parents H>M>L
For elders L>M>H
For young couples M>L.>H
Hence no matter what ordering is used M will be preferred to other options majority voting has aggregate individual preferences to produce a preferred social outcome.
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