text_TITL pruh_TITL N:\work\projekty\šablony\sablony\logoC.wmf Public choice and government failures BPV_APEC Public Economics Jan Řezáč 21/10/2014 BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi What are we going to talk about? nHow does decision making in private and public sectors differ? nHow to make good decisions in public sector? nAre there any influences? nOr paradoxes? BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Private Sector nEquilibrium: demand curve and supply curve n nIndividuals reveal preferences about the private goods by buying them n nPrice reflects individual’s n preferences n BPV_APEC Public Economics: Public Choice C:\Users\216776\Documents\Public economics\SDemand.jpg www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Public Sector nNo demand x supply equilibrium nPrice is not obvious nDecisions made by public agencies, not „customers“ nIndividuals vote to elect representatives who vote for public budget nBudget is spent by public agencies nNo comparability to private sector BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi What is public choice? n “Public choice can be defined as the economic study of nonmarket decision making“, “Application of economics to political science” (Mueller, 2009) n Covers: ntheory of the state nvoting rules nvoters behavior nbureaucracy nlegislatures netc. BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi An easy public choice: Action Name Cost Benefit C/B A Cycling roads 500 600 1,2 B Recreational center 290 290 1 C Ice hockey hall 200 180 0,9 D Stadium reconstruction 280 350 1,25 E Youth sport support 240 300 1,25 BPV_APEC Public Economics: Public Choice Your budget is 800. For every action, the benefit is + 100. What is the best combination? www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Voting in Public Sector nUNANIMITY n Time consuming n Leads to Pareto-preferred situation n Encounters strategic behavior nMAJORITY n Most used n Lower costs n Less time to make decision n Some individuals will be worse off BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Majority rules: nSimple majority rule (>50%) nRunoff election (1st round >50% if not best 2 to 2nd round) nPlurality rule (most “popular” wins) nApproval voting (choose more options; most “popular” wins) nBorda count (n choices, give to each option points {1,2,…,n}, most popular n, least popular 1; most points wins) nHare system (select best; in each round the least popular options leaves until there is only one) nCoombs system (select worse; in each round the least popular options leaves until there is only one) n BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi What can influence the voting? nPersonal constrains attitudes nPhysical, social, economic, moral, psychological, etc. n n nExternal influences nPolitics, lobbying, corruption, international relations, legislation, economics, labor unions, etc. nWould you make voting compulsory? BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Tactical voting nCompromising (what happens if the country has first-past-the-post election systems?) n nBurying - very useful if some party has open primaries n nPush-over – Imagine you are a French voter, who likes Sarkozy. Polls for first round say: nSarkozy 24%, Hollande 18%, Le Pen 17%, lot of other candidates, the Left has a majority. BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Condorcet criterion nUsed to measure efficiency of choices n Pair-wise comparison of possible outcomes BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Tennessee needs a new capital, but where? BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi The preferences of the voters 42% of voters (close to Memphis) 26% of voters (close to Nashville) 15% of voters (close to Chattanooga) 17% of voters (close to Knoxville) 1.Memphis 2.Nashville 3.Chattanooga 4.Knoxville 1.Nashville 2.Chattanooga 3.Knoxville 4.Memphis 1.Chattanooga 2.Knoxville 3.Nashville 4.Memphis 1.Knoxville 2.Chattanooga 3.Nashville 4.Memphis BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Matrix A Memphis Nashville Chattanooga Knoxville B Memphis [A] 58% [B] 42% [A] 58% [B] 42% [A] 58% [B] 42% Nashville [A] 42% [B] 58% [A] 32% [B] 68% [A] 32% [B] 68% Chattanooga [A] 42% [B] 58% [A] 68% [B] 32% [A] 17% [B] 83% Knoxville [A] 42% [B] 58% [A] 68% [B] 32% [A] 83% [B] 17% Ranking: 4th 1st 2nd 3rd BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Arrow's impossibility theorem nVoting rule should fulfill: n nUniversality (all choices are allowed) nNon-dictatorship nPareto efficiency nIndependence of irrelevant alternatives. n nBut none of the rules does! n nIn other words: No voting rule is fair. BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi www.econ.muni.cz The paradox of voting  Also called Downs paradox  Individual preferences in a group may lead to ineffective outcome therefore voting becomes irrational.  Decision of people to cast a vote is led not only by a human rationality. BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Not only humans vote BPV_APEC Public Economics: Public Choice The honeybee occasionally needs Find a new place for a nest. The swarm sends out scout bees To look for a new location www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi What method the bees use? nFirst the researchers thought bees prefered unanimity. n n nThen they observed that only a quorum is sufficient – 30 bees out of 75 bees at a potential nest site. BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi How to reward bureaucrats? n BPV_APEC Public Economics: Public Choice C:\Users\216776\Documents\Public economics\how to pay the bureacrat.jpg www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi nThere are huge differences between countries: n nTop pay for elite work n nStrict seniority n nProject management n BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Can we or governement punish bureacrats if something goes wrong? nMost projects end behind schedule. n nAlso more expensive and less useful then expected initially. n nWhat exactly would we punish? BPV_APEC Public Economics: Public Choice www.econ.muni.cz pruh+znak_ESF_13_gray4+bily_RGB pruh+znak_ESF_13_gray4+bily_RGB text_zahlavi Can we reward bureacrats if they do well? BPV_APEC Public Economics: Public Choice text_TITL pruh_TITL N:\work\projekty\šablony\sablony\logoC.wmf Thank you for your attention http://www.mobileapples.com/Assets/Content/Screensavers/Bye%20Bye.gif BPV_APEC Public Economics: Public Choice