Murdoch University

　

　

Economics Department

Division of Business, Information Technology and Law

　

　

Bachelor of Arts

in

Public Policy and Management

　

　

　

　

Assess the value of public choice theory as a guide to understanding the way public sector decisions are made.

　

　

　

Course Code : C2814

Course Name : Public Economics

Course Coordinator : Dr. Frank Harman

　

　

Student Name: Kam Ka-lung (987621G)

　

Date of Submission: 29 August 1998

　

　

Introduction

In the modern society, there are many sectors or organizations that made decision. For instance, business organization and the government. In the private sector, all decision can be determined by the market demand and supply. However, in the private sector, most of the decisions are made by bureaucrats. As the idea of democracy appear, people are more intend to express their opinion. The democratically elected government to respond to the national interest.

In this essay, we will discuss the definition and origin of public choice. As the outset, we examine direct democracy, and how well they translate the preferences of their members into collective action. After that, we then turn to the complications that arise when decisions are made by individuals themselves, but by their elected representatives.

　

　

Section I: Definition and Literature Review

Public choice can be defined as the economic study of non-market decision making, or simply the application of economics to political science. The subject matter of public choice is the same as that of political science: the theory of state, voting rules, voter behaviour, party politics and the bureaucracy. The methodology of public choice is that of economics. The basic behavioral postulate of public choice, as for economics, is that man is an egoistic, rational and utility maximizer. (Mueller, 1989)

This places public choice within the stream of political philosophy extending at least from various scholars. The modern public choice literature employs the analytic tools of economics.

The other author of discussing public choice is Dr. James M. Bunchanan. He won the 1986 Nobel Prize in economics for his public choice theory of public and political decision making. He applied scientific economics methods to the “public choice behaviour” of voters, politicians and bureaucrats.

With reference with his articles, “choice” is the act of selecting from among alternatives. “Public” refers to people or public. But people do not choice. Individuals make it, and these may be “private” or “public”. He makes “public choice” when he selects among alternatives for others as well as for himself. Such choices become the objects of inquiry in public choice.

While traditional economic theory has been narrowly interpreted to include only the private choices of individuals in the market process. Public choice is the intersection of these two disciplines: the institutions are those of political science, and the method is that of economic theory.

Public Choice scholars characterized by their emphasis on comparative institutional analysis by their concentration on the necessary relationship between economic and political institutions. They are realists who do not view the government as necessarily performing less poorly than the market. Public choice analysts share a lack of enthusiasm for government for the solution to innumerable problems. The realization is that markets are imperfect, but that alternative institutions may also have defects.

　

　

Section II: Background of Public Choice

The theory of public choice must related to public goods and externalities. If the state exists as a sort of analogue to the market to provide public goods and eliminate, then it must accomplish the same preference revelation task for these public goods as market achieves of private goods.

The public choice approach to decision making has been:

    1. To make the same behavioural assumptions as general economics (rational, utilitarian individuals);

    2. Often to depict the preference revelation process as analogous to the market (voters engage in exchange, individuals reveal their demand schedules via voting); and

    3. To ask the same questions as traditional price theory.

In the following section, we will examines criteria for choosing a voting rule when the collective choice is restricted to a potential improvement in allocative efficiency and discuss the relationship between organizations in public choice, that are voters, politicians and bureaucrats. (Rosen, 1992)

　

　

Section III: Components in Public Choice

In this section, we will explain the relationship of components in public choice theory, which are voters, politicians and bureaucrats. In the first part, we will discuss the voters’ behaviour.

　

Voters and Direct Democracy

The irony of the free rider problem is that everyone could be better off if the public good were provide efficiency, but because people act in their narrow self-interest, not enough is provided. This suggests that in principle, if a vote were taken on whether to provide the good in an efficient quantity, consent would be unanimous as long as there was a suitable tax system to finance it.

There are many theories to illustrate the theory of public choice, such as unanimity rule, voting paradox and majority voting rule. These can calculate the preferences of voters on several social issues. However, in this section, the median voter theorem will be discussed.

People rank each alternative on the amounts of a single characteristics. An example is how much of some public good to acquire. Define the median voter as the voter whose preferences lie in the middle of the set of all voters’ preferences; half the voters want more of the good than the median voter and half want less. The median voter theorem states that as long as all preferences are single peaked, the outcome of majority voting reflects the preferences of the median voter. (Black, 1948)

When all preferences are single peaked, majority voting yields a stable result, and the choice selected reflects the preferences of the median voter. However, when all voters’ preferences are not single-peaked, a voting paradox may emerge. Because multi-peaked preferences may be important in many realistic situations, majority voting cannot be depended on to yield consistent public choices.

　

Logrolling

Some argue that an important problem with simple majority voting is that it does not allow people to register how strong they feel about the issues. Whether a particular voter just barely prefers A to B or has an enormous preference for A has no inference on the outcome. Logrolling systems allow people to trade voters and hence register how strong they feel about various issues.

Vote trading is controversial. Its proponents argue that trading votes leads to efficient provision of public goods, just as trading in commodities leads to efficient provision of private goods. Proponents also emphasize its potential for revealing the intensity of preferences and establishing a stable equilibrium. Moreover, the compromises implicit in vote trading are necessary for a democratic system to function.

　

Arrow’s Impossibility Theorem

The other theory that discussed with voting is Arrow’s Impossibility Theorem. Kenneth Arrow (1951) proposed that in a democratic society, a collective decision-making rule should satisfy the following criteria:

    1. It can produce a decision whatever the configuration of voters’ preferences;

    2. It must be able to rank all possible outcomes;

    3. It must be responsive to individuals’ preferences; and

    4. Dictatorship is ruled out.

James Buchanan (1960) also discussed the Arrow’s Impossibility Theorem and view the inconsistencies of majority voting as having beneficial aspects. He said majority rule is acceptable in a free society precisely because it allows a sort of jockeying back and forth among alternatives, upon none of which relative unanimity can be obtained. It serves to insure that competing alternatives may be experimentally and provisionally adopted, tested and replaced by new compromise alternatives approved by a majority group of ever-changing composition.

　

Elected Politicians

Our earlier discussion of direct democracy led to the median voter theorem: If individual preferences are single peaked and can be represented along a single dimension, the outcome of majority voting reflects the preferences of the median voter.

The process of political decision making is clearly very complicated. We examine it using simple economic models of the behavior of some of the key people involved. These models typically assume that people in government attempt to maximize their self-interest. Two points are important regarding this assumption:

    1. Selfishness does not necessarily lead to inefficient outcomes; and

    2. While the maximization assumption may not be totally accurate, just in more conventional settings, it provides a good starting point for analysis.

In reality, direct referenda on fiscal matters are most unusual. More commonly, citizens elect representatives who make decisions on their behalf. Nevertheless, under certain assumptions, the median voter theory can help explain how these representatives set their position.

　

Bureaucrats in Government

The next group we consider is public employees, also referred to as bureaucrats. To understand their role, note that the legislation enacted by elected politicians is often vague. Bureaucrats have been the targets of much bitter criticism. They are blamed for being unresponsive, creating excessive red tape, and intruding too much into the private affairs of citizens.

However, that a modern government simply cannot function without bureaucracy. Bureaucrats provide valuable technical expertise in the design and execution of programs. Moreover, the fact that their tenures in office often exceed those of elected officials provides continuity in government that would otherwise be lacking.

On the other hand, it would be naive to assume a government bureaucrat’s only aim to interpret and passively fulfill the wishes of the electorate and its representatives. Having said this, we are still left with the problem of specifying the bureaucrat’s goal.

William Niskanen (1971) argued that in the market-oriented private sector, an individual who wants to “get ahead” will do so by making his or her company as profitable as possible. When the firm’s profits go up, so will the individual’s salary. In contrast, bureaucrats tend to focus on such items as perquisites of office, public reputation, power and patronage. It is because opportunities for monetary gains are minimal. Niskanen suggested that all of these objectives hence concluded that the bureaucrat’s objective is to maximize his or her budget.

　

　

Section IV: Outcome: Control of Government

As we discussed the three components of public choice, that are bureaucrats, politicians and voters, we will access the outcome and value of public choice theory in the public decision making process. There are three ways that control of government.

Firstly, it can change the bureaucratic incentives. Niskanen suggests that financial incentives be created to mitigate bureaucrats’ empire-building tendencies. In addition, expending the use of private firms to produce public goods and service, although the public sector would continue to finance them.

Moreover, it can change the budget process. Most of the focus bringing government spending under control has been on the budget-making process itself. For example, the President submitted a budget message to Congress.

Lastly, there are some institute constitutional limitations. The proposals to control the growth in government include decentralization to reduce bureaucratic power, encouraging private-sector competition, reforming the budget process and direct legislative restrictions.

　

　

Conclusion

Public choices are made in a complicated fashion that is not well understood. Contrary to simple models of democracy, there appear to be forced pulling government expenditures away from levels that would be preferred by the median voter. In this context, it should be stressed that the judgement that government currently may be inequitable or inefficient does not necessarily imply that government as an institution is “bad”, or as “government failure”. People who like market-oriented approaches to resource allocation can nevertheless seek to improve markets. The same goes for government.

　

　

References

Black, D. “On the Rationale of Group Decision Making”, Journal of Political Economy 56 (February 1948), pp. 23-34.

Dennis C. Mueller, “Public Choice II”, Cambridge University Press, 1989.

Dennis C. Mueller (ed.), “Perspectives on Public Choice”, Cambridge University Press, 1997.

Harvery S. Rosen, “Public Finance”, Richard D. Irwin, Inc., 1992.

Samuel Baker & Catherine Elliott, “Readings in Public Sector Economics”, D. C. Heath and Company, 1990.

Peter Self, “Government by the Market”, Theories of Political Behavior, Macmillan, 1993.

Patrick Dunleavy, “Existing Public Choice Models of Bureaucracy”, Democracy, Bureaucracy and Public Choice, Prentice-Hall, 1991.

　

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