Public Finance 10th Edition By Hyman – Test Bank

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Chapter 5

Public Choice and the
Political Process

Instructional Objectives

Public choice theory and economic analysis of the political process are the subjects of this chapter. The concept of political equilibrium is introduced as a means of providing the student a way of comparing market equilibrium with public sector equilibrium. Positive analysis is used to predict the outcome of political interaction under majority rule, while normative analysis is used to explore efficiency aspects of political interaction. At the outset of the chapter, the student is made aware of the simplifying assump­tions to be used. The dependent variable is the output of a pure public good over a given time period. It is also assumed that each voter knows his or her share of the cost per unit of the public good. These simplifications allow the determination of the conditions required for political equilibrium.

A major goal of the chapter is to make clear the differences between political and market equilib­rium. To do so, an analogy is made between the tax shares, t, of citizens for public goods and the prices of market goods. It is then a simple matter to point out that a person’s most-preferred political outcome corresponds to the output for which MB = t. The political equilibrium itself depends on the public choice rule, information available to voters, the distribution of tax shares among voters, and the distribution of benefits of the public good among voters.

The median voter model is emphasized in the chapter, and its implications for the behavior of polit­ical candidates is highlighted. The possibility of nonexistence of political equilibrium due to multiple-peaked preferences is also explored. There is, as well, a discussion of the likelihood of multiple-peaked preferences and Arrow’s impossibility theorem.

The chapter also integrates important issues concerning the political process with the theory of public choice. These issues include (1) incentives to vote and the impact of nonvoting on political equi­librium, (2) political externalities and political transactions costs, (3) logrolling, and (4) the impact of special interest groups and bureaucracy on political equilibrium. The logrolling model shows how vote trading and the pairing of issues on the ballot can lead to losses in efficiency.

Changes in This Edition

Information on voter turnout has been updated to include the 2008 presidential elections.

Chapter Outline

The Supply of Public Goods through Political Institutions: The Concept of Political Equilibrium

Political Equilibrium

Elections and Voting

To Vote or Not To Vote

Determinants of Political Equilibrium

A Model of Political Equilibrium under Majority Rule

Election Results under Majority Rule

The Median Voter

Uniqueness and Cycling of Outcomes under Majority Rule

Single-Peaked and Multiple-Peaked Preferences

Pair-wise Elections: The Phenomenon of Cycling

The Cause of Cycling

Existence of Multiple-Peaked Preferences

The Political Process

Constitutions

A Classification of Collective Choice Rules

Minority Rule

Majority Rule

Choice of the Collective Decision-making Rule

Costs and Benefits of Collective Action

Unanimous Consent

Relative Unanimity and the Rights of Minorities

Plurality Rule

Point-Count Voting

Instant Runoff Voting

Public Policy Perspective: Public Choice in U.S. Cities: Political Institutions Matter

Political Parties and Political Equilibrium

The Median Voter, Political Parties, and Political Equilibrium under Majority Rule

The Effect of Nonvoting on Political Equilibrium

Voting on More Than One Issue at a Time: Logrolling

Implicit Logrolling

Logrolling and Efficiency

Public Policy Perspective: State Government Spending: Does the Size of the Legislature Matter?

Global Perspective: Tariffs and Import Quotas on Textiles and Apparel in the United States: Special Interest Groups in Action

Special Interest Groups and Their Impact on Political Equilibrium

Bureaucracy and the Supply of Public Output

Bureaucratic Behavior

Major Points and Lecture Suggestions

1. Make sure students are aware of the simplifying assumptions made in most models of political equilibrium. The issue under consideration is single-dimensional. In most cases the variable is the quantity of a pure public good to supply per year. Voters are assumed to know the tax per unit of the public good before deciding how to vote.
2. Students are very receptive to the definition of a political equilibrium as an agreement on the level of periodic supply of a pure public good, given the collective choice rule and the distribution of tax shares among voters.
3. Emphasize that a person’s most-preferred political outcome is the one for which that person’s tax share equals his or her marginal benefit from the public good: t_i = MB_i. In class point out that this is analogous to P = MB_i for a private good. However, each consumer can adjust consumption to achieve the latter condition in a market. Political supply of a pure public good under majority rule can result in some voters not achieving the former condition. Point out that any voter’s most-preferred political outcome depends both on that person’s tax share and preferences.
4. The basic point you want to get across in class is that political equilibrium depends on certain impor­tant economic variables, given the collective choice rule and voter preferences. These include the distribution of marginal tax shares, the average and marginal cost of the public good, and the dis­tribution of benefits of the public good. Note that throughout the chapter the marginal tax rate is assumed to equal the average tax rate for all voters. In addition, for simplicity, MC = AC for the public good.
5. The first model of political equilibrium in the chapter assumes that all voters have equal tax shares. This is the model developed by Bowen. The simple example in the text deals with the supply of security protection by seven members of a condominium community. Table 5.1 in the text shows the tally sheet for each successive election to increase security protection. Students must understand that voters vote in favor of hiring additional security guards as long as the marginal benefit of each extra guard does not fall short of the extra tax they must incur to finance that guard.
6. The median voter is defined as the one whose most-preferred outcome is the median of the most-preferred outcome of all voters. Many students are easily confused because they think that the median voter is a particular person. My definition makes it clear that the identity of the median voter can change over time. For example, if all voters have the same most-preferred outcome, then any one of them can be regarded as the median voter. In fact, under those circumstances, the political equi­librium under majority rule will be identical to the political equilibrium under unanimous consent. Point out that the greater the dispersion of most-preferred outcomes from the median, the greater the dissatisfaction with political outcomes under majority rule.
7. The problem of absence of political equilibrium when multiple-peaked preferences exist is hard to get across to students. I use a simple numerical example that shows that when one out of three voters has multiple-peaked preferences, there is no political equilibrium. Point out to students that this means that there is no one alternative that when placed on the ballot will dominate others. Each winner can be paired with some other alternative and lose. This is the phenomenon of cycling. The students find the fireworks display example amusing.
8. Single-peaked preferences imply that there is one alternative that the voter prefers to all others and that he or she is made worse off if either more or less of the most-preferred output is supplied.
9. When all voters have single-peaked preferences, there can be no cycling. In the example, two fire­works displays per year is the political equilibrium. This means that whenever it appears on the

   ballot, it will defeat the alternative with which it is paired. Point out that the political equilibrium under majority rule in this case is always the median most-preferred outcome. This is the median peak of all the net benefit functions.

10. Most texts do not have a discussion of the likelihood of multiple-peaked preferences. I point out that multiple-peaked preferences are inconsistent with declining marginal benefit of a good. How­ever, I also give examples of cases for which multiple-peaked preferences are reasonable. The first case deals with a government good (schooling) that has a market substitute. The second one deals with the Vietnam war. Students find these examples interesting.
11. Voter turnouts are commonly well below 100 percent in the United States. The cost of voting is positive, while the expected benefit to a particular voter is close to zero. The text also points out that the incentive to vote depends on the closeness of alternatives available to voters and the extent to which the voters most-preferred outcome approximates those on the ballot.
12. Although each person has only one vote in a democracy, there is always the incentive to expend resources to influence the votes of others. This provides the basis for political activity and contri­butions to political candidates or parties.
13. Nonvoting by citizens has the potential of affecting the political equilibrium under majority rule. This is because the median most-preferred outcome of all those voting can differ from the median most-preferred outcome of all citizens, when some citizens do not vote. However, when as many citizens on the left as on the right do not vote (i.e., the pattern of nonvoting is symmetric about the mean for a single dimensional issue), the median most-preferred outcomes of all voters and citizens will be identical.
14. The logrolling analysis shows how the pairing of two issues, neither of which can pass by itself under majority rule, can result in passage of both. The key to getting students to understand log­rolling is to point out that the net gains to voters from passage of one issue must exceed the net loss from passage of the other. If there were symmetry between gains and losses on issues, logrolling would not change the political equilibrium.
15. Under logrolling there is either explicit vote trading or implicit collusion to get issues paired on the ballot. Figure 5.8 in the text is based on a simple numerical example to show how logrolling gains passage of two issues—the supply of one fireworks display and the hiring of one security guard per week—even though neither can pass on its own. I have used this example in class many times, and students catch on to the point easily. They also readily see the possible losses in efficiency caused by logrolling.
16. Becker’s work on special interest groups is timely and relevant. Two important points should be emphasized. First, successful special interest groups are likely to be small relative to the portion of the population that finances its subsidies. This is because the cost of the subsidy per taxpayer will be smaller and more easily hidden when the total subsidy is small. Second, the limit to the process is the losses in efficiency that occur from the subsidies and the taxes that finance them. When persons are members of more than one pressure group, improved information could reduce the amount of subsidies that can be successfully passed.
17. Students find the assumption that bureaucrats try to maximize the size of their budgets a reason­able one. The implications for efficiency are made clear in Figure 5.9 in the text. The bureaucrat’s most-preferred output is the one for which TSB = TSC. The bureaucrat tries to convince its funding source that extra output is warranted as long as TSB > TSC. The efficient output level, however, is less than this because it corresponds to the annual output for which MSB = MSC. It is essential to point out to students that this does not imply that the bureaucrat is successful in achieving its objec­tive. Bureaus must compete for funds. A good system of budgeting would serve to make sure that the output of any bureau does not exceed its efficient level. The main point is that bureaucrats do have incentives to produce more than the efficient output. This incentive must be constrained appro­priately to achieve efficiency.

Answers to Text Problems

1. a.   If each resident had to buy landscaping services as a private good in the market, no gardeners would be hired because the marginal cost of $350 for the first gardeners exceeds the marginal benefit of $100 for any single resident. The arrangement is inefficient because the sum of the marginal benefits of the first gardener is $700, which exceeds the marginal cost of $350.
2. The political equilibrium under majority rule will be three gardeners. At the $50 per voter tax share, given that all voters have identical marginal benefit schedules, the sum of the marginal benefits will be $350, which is equal to the marginal cost of gardening services. In fact, if hiring three gardeners is proposed, it would be the political equilibrium not only under majority rule,

   but also under unanimous consent, because all seven residents will vote in favor of it. There is no difference between the political equilibrium under majority rule and the Lindahl equilibrium in this case.

3. The political equilibrium under majority rule is two gardeners. This differs from the efficient quantity of three, which would result under a Lindahl equilibrium. Under the Lindahl equilibrium, each voter would pay a tax share per unit of the public good equal to their marginal benefit corresponding to three gardeners. Total taxes collected from the five residents would be $1,050 per week, which exactly covers the cost of the three gardeners each week.
4. A $60 transaction cost for Voters A and C would have to be subtracted from their marginal benefit. After the subtraction, both A and C would vote against one security guard and fireworks display per week because their net marginal benefit of only $190 each would be less than their $200 tax share. Similarly, Voter A would vote against the combined public good if his marginal benefit from the first security guard were only $150, because this would be below the $200 tax.
5. The median most-preferred outcome would shift to the liberal side if more conservatives than lib­erals chose not to vote. Assume that liberals want more government spending than conservatives; this would mean more public goods.
6. The marginal costs will seem lower than the actual marginal cost, and this will result in more than the efficient output.
7. Government waste is the result of bureaucrats seeking to maximize power by maximizing budgets by convincing governments to spend more than is necessary through the use of private information.  When you have competing agencies (e.g. different armed services), the private information is now obtainable by more than one source and creates competition for resources (assuming no collusion).
8.    A logrolling process allows for subsidies for Amtrak because it becomes part of a bill with other items.  A district with no Amtrak service may still be served by other items on the bill which allows its representative to vote in favor of funding Amtrak.
9.  Looking at diagram 5.6, one can see the variation in the net benefit for each voter relative to the amount of government goods and services produced.  The amount of goods and services produced will be the level that appeals to the median voter creating a majority (Figure 5.7).  Unusual positions, to the left and right of the median will vote in a manner that will have government supplied goods and services over-compensating their net benefit or possibly not voting at all.

True/False Questions

1. A political equilibrium for a pure public good is generally independent of the collective choice rule used. (F)
2. A voter’s most-preferred political outcome will change if, other things being equal, that person’s tax share per unit of the public good is changed. (T)
3. A proposal is put forward to increase the number of police officers. You estimate that your mar­ginal benefit from police protection just equals your tax per police officer at the number of officers that would constitute the police force if the proposal passes. You will therefore vote in favor of the proposal. (T)
4. If all voters have the identical most-preferred political outcome, given their tax shares, then the political equilibrium under majority rule will be identical to the political equilibrium under unani­mous consent. (T)
5. The median voter is the one whose most-preferred political outcome is the median of the most-preferred outcome of all those voting. (T)
6. If all voters have single-peaked preferences, a political equilibrium will not be possible under majority rule. (F)
7. A person with multiple-peaked preferences is always made worse off as the quantity of a pure public good is increased, or decreased, once he or she attains his or her most-preferred political outcome. (F)
8. Logrolling always succeeds in passing two paired issues that could not pass if voted on separately. (F)
9. A bureaucrat who seeks to maximize the annual size of his budget each year will propose annual output levels corresponding to the amount for which MSB = MSC. (F)
10. Political transactions costs are likely to be greater under unanimous consent than under majority rule. (T)
11. Political externalities are likely to be negligible when collective choices are made under majority rule. (F)
12. Unanimous consent is a collective choice rule that will protect the rights of minorities. (T)
13. A person for whom the marginal benefit of a public good declines as more is made available has single-peaked preferences. (T)
14. Cycling can occur in elections under majority rule if some voters have multiple-peaked prefer­ences. (T)
15. Special interest groups are more likely to gain income through the political process if they are a large percentage of the population. (F)
16. A ration person’s most preferred political outcome is when the cost of the quantity of government-supplied goods is below the marginal benefit. (F)
17. A budget-maximizing bureaucrat seeks funding levels where the total social cost equals the total social benefit. (T)
18. Logrolling can allow more than one issue of minority interest to be passed. (T)

Multiple Choice Questions

1. A community currently hires 10 security guards per week to patrol their neighborhood. Each secu­rity guard costs $300 per week. Assuming that the tax-sharing arrangement agreed to results in each of 300 voters paying the same tax share, each voter pays a weekly tax bill of:
2. $1.
3. $3.
4. $10.
5. $30.
6. A small community currently taxes residents to provide monthly community concerts. Voter A currently pays a tax per concert equal to $50 per month. This voter receives a marginal benefit of $75 at the current political equilibrium number of concerts per month. Voter A:
7. is the median voter.
8. would be made better off if the number of monthly concerts were increased.
9. would be made worse off if the number of monthly concerts were increased.
10. has achieved his most-preferred political outcome for monthly concerts.
11. A proposal to build new roads in a small town is up for a vote. Voter B estimates that his marginal benefit of roads at the proposed new level would be $80 per year. This voter will vote against the proposal:
12. no matter what her tax share.
13. if her tax share is $80.
14. if her tax share is less than $80.
15. if her tax share exceeds $80.
16. Currently eight security guards patrol a condominium community each week. The number of guards has been determined by majority rule. Each voter pays a tax share of $50 per guard. If Voter M is the median voter,
17. his marginal benefit from security guards is $50.
18. his marginal benefit exceeds that of any other voter.
19. the difference between his marginal benefit and $50 is at a maximum.
20. he would be made better off if more security guards were hired per week.
21. If all voters have single-peaked preferences, then under majority rule:
22. cycling of political outcomes can occur.
23. a political equilibrium exists.
24. the political equilibrium is the median most-preferred outcome.
25. both (b) and (c)
26. If a person has multiple-peaked preferences for a pure public good,
27. that person is always made worse off when moving away from his or her most-preferred polit­ical outcome.
28. that person will become worse off at first, but then become better off, when moving away from his or her most-preferred political equilibrium.
29. the marginal benefit of the pure public good always declines for that person as more is made available.
30. both (b) and (c)
31. Implicit logrolling results when:
32. any two issues are paired on a ballot.
33. two voters succeed in pairing two issues on a ballot that can pass together but would fail indi­vidually.
34. voters agree to trade votes on an issue.
35. the pairing of two issues on a ballot allows the achievement of efficiency.
36. Voter A will normally vote in favor of one security guard per week because his marginal benefit is $125 and his tax share is $100 per week. Voter A receives zero marginal benefit from one concert a week and would vote against it. Voter B receives $125 marginal benefit from one concert per week but no marginal benefit from one security guard. One concert per week also will fail to gain a majority when put to the vote. Assuming that both Voter A and Voter B will pay $100 per week in tax for each concert and each security guard,
37. they can both gain by engaging in logrolling on the two issues.
38. pairing the issues on one ballot will result in both Voter A and Voter B voting in favor of the combined issue.
39. pairing the issues on one ballot will result in both Voter A and Voter B voting against the com­bined issue.
40. implicit logrolling will result in Voter A voting in favor of the combined issue, but in Voter B voting against it.
41. A voter may choose not to vote in an election between two alternatives because:
42. he or she is indifferent between the two alternatives.
43. his or her probability of influencing the result is zero.
44. his or her most-preferred alternative is far from the two offered on the ballot.
45. all of the above
46. If bureaucrats seek to maximize the size of their budgets, they will:
47. seek to fund levels of services up to the point at which MSC = MSB.
48. seek to fund levels of services for which TSB > TSC.
49. seek to fund levels of services for which MSC > MSB.
50. both (b) and (c)
51. The demand curve for a pure public good is:
52. obtained by adding the quantity demanded at each possible price for all consumers.
53. obtained by summing the marginal benefits of each consumer for each possible quantity.
54. always upward sloping.
55. always a flat line.
56. A voter’s most-preferred political outcome will be that for which the:
57. marginal benefit of a pure public good is equal to the voter’s tax share per unit.
58. total benefit per unit of a pure public good is equal to the voter’s tax share per unit.
59. difference between the marginal benefit of a pure public good and the voter’s tax share per unit is maximized.
60. marginal benefit of a pure public good is equal to zero, no matter what the voter’s tax share per unit.
61. If all voters have single-peaked preferences for a pure public good, then the political equilibrium under majority rule:
62. cannot be defined.
63. is the median outcome.
64. is the median most-preferred outcome of all voter’s voting.
65. will not change if tax shares change.
66. Which of the following collective choice rules is likely to have the lowest political externalities?
67. two-thirds majority rule
68. simple majority rule
69. plurality rule
70. unanimous consent
71. Which of the following collective choice rules is likely to incur the highest political transactions costs?
72. two-thirds majority rule
73. simple majority rule
74. plurality rule
75. unanimous consent
76. If the marginal social benefit of one more unit of a good is 10 and the marginal social cost of one more unit of a good is 11, then:
77. the output of the good is efficient.
78. a bureaucrat can still increase the bureau’s budget.
79. a bureaucrat can increase the bureau’s budget if the total social cost exceeds the total social benefit.
80. a bureaucrat can increase the bureau’s budget if the total social cost is below the total social benefit.
81. The plurality rule is:
82. a collective bargaining rule.
83. a rule that is guaranteed to have majority decision.
84. a means of determining between only two possible outcomes.
85. a rule that cannot lead to a minority decision.
86. Arrow’s impossibility theorem states:
87. a unique political equilibrium for a public choice never exists.
88. a unique political equilibrium for a public choice cannot exist under majority rule.
89. a unique political equilibrium can exist if there is majority rule and multi-peaked preferences.
90. a unique political equilibrium for a public good cannot exist under unanimous consent.
91. Suppose tax shares are evenly distributed for a particular service at the amount of $100.00 per person. Which taxpayer suffers a political externality based on the taxpayer’s marginal benefit for the service?
92. Taxpayer A has a marginal benefit of $100.00.
93. Taxpayer B has a marginal benefit of $200.00.
94. Taxpayer C has a marginal benefit of $90.00.
95. Taxpayers B and C.
96. A public choice is:
97. free of any political interaction or process.
98. by majority rule only.
99. one made through political interaction of many people according to established rules.
100. by unanimous consent only.

Essay Questions

1. Explain why all voters will have single-peaked preferences for a pure public good if the marginal benefit they receive from that good declines as more is made available per year. Explain how each voter decides whether to vote in favor of or against a proposal for a certain quantity of the pure public good to be made available per year. Assuming that tax shares are given, what can you say about the political equilibrium under majority rule? Show how an increase in the average cost of producing the pure public good will affect the political equilibrium.
2. a.   What are the advantages and disadvantages of logrolling? How can logrolling for two pure public goods under majority rule prevent the attainment of efficient outcomes?
3. How do government bureaus differ from private firms? Why is there good reason to believe that bureaucrats will seek to supply more than the efficient level of their output in any year? Use a graphic analysis to show the losses in efficiency that will result if a government bureau succeeds in maximizing its annual expenditures.