PUBLIC CHOICE AND GOVERNMENT FAILURES Miloš Fišar 20.10. 2015 BPV_APEC PUBLIC ECONOMICS WHAT ARE WE GOING TO TALK ABOUT? §How does decision making in private and public sectors differ? §How to make a good decision in public sector? §Are there any influences? §Or paradoxes? 20.10. 2015 BPV_APEC PUBLIC ECONOMICS PRIVATE SECTOR §Equilibrium: demand curve and supply curve § §Individuals reveal preferences about the private goods by buying them § §Price reflects individual’s preferences § 20.10. 2015 BPV_APEC PUBLIC ECONOMICS http://thismatter.com/economics/images/market-equilibrium-diagram.png PUBLIC SECTOR §No demand x supply equilibrium §Price is not obvious §Decisions made by public agencies, not „customers“ §Individuals vote to elect representatives who vote for public budget §Budget is spent by public agencies §No comparability to private sector 20.10. 2015 BPV_APEC PUBLIC ECONOMICS WHAT IS THE PUBLIC CHOICE? § “Public choice can be defined as the economic study of nonmarket decision making“, “Application of economics to political science” (Mueller, 2009) § Covers: §theory of the state §voting rules §voters behavior §bureaucracy §legislatures §etc. 20.10. 2015 BPV_APEC PUBLIC ECONOMICS VOTING IN PUBLIC SECTOR §UNANIMITY §Time consuming §Leads to Pareto-preferred situation §Encounters strategic behavior §MAJORITY §Most used §Lower costs §Less time to make decision §Some individuals will be worse off 20.10. 2015 BPV_APEC PUBLIC ECONOMICS MAJORITY RULES: §Simple majority rule (>50%) §Runoff election (1st round >50% if not best 2 to 2nd round) §Plurality rule (most “popular” wins) §Approval voting (choose more options; most “popular” wins) §Borda count (n choices, give to each option points {1,2,…,n}, most popular n, least popular 1; most points wins) §Hare system (select best; in each round the least popular options leaves until there is only one) §Coombs system (select worse; in each round the least popular options leaves until there is only one) § 20.10. 2015 BPV_APEC PUBLIC ECONOMICS WHAT CAN INFLUENCE THE VOTING? §Personal constrains attitudes §Physical, social, economic, moral, psychological, etc. § § §External influences §Politics, lobbying, corruption, international relations, legislation, economics, labor unions, etc. §Would you make voting compulsory? 20.10. 2015 BPV_APEC PUBLIC ECONOMICS TACTICAL VOTING §Compromising (what happens if the country has first-past-the-post election systems?) § §Burying - very useful if some party has open primaries § §Push-over – Imagine you are a French voter, who likes Sarkozy. Polls for first round say: §Sarkozy 24%, Hollande 18%, Le Pen 17%, lot of other candidates, the Left has a majority. 20.10. 2015 BPV_APEC PUBLIC ECONOMICS CONDORCET CRITERION Used to measure efficiency of choices Pair-wise comparison of possible outcomes 20.10. 2015 BPV_APEC PUBLIC ECONOMICS TENNESSEE NEEDS A NEW CAPITAL, BUT WHERE? 20.10. 2015 BPV_APEC PUBLIC ECONOMICS 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 20.10. 2015 BPV_APEC PUBLIC ECONOMICS 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 20.10. 2015 BPV_APEC PUBLIC ECONOMICS ARROW'S IMPOSSIBILITY THEOREM §Voting rule should fulfill: § §Universality (all choices are allowed) §Non-dictatorship §Pareto efficiency §Independence of irrelevant alternatives. § §But none of the rules does! § §In other words: No voting rule is fair. 20.10. 2015 BPV_APEC PUBLIC ECONOMICS THE PARADOX OF VOTING §Also called Downs paradox §Individual preferences in a group may lead to ineffective outcome therefore voting becomes §Decision of people to cast a vote is led not only by a human rationality. 20.10. 2015 BPV_APEC PUBLIC ECONOMICS NOT ONLY HUMANS VOTE 20.10. 2015 BPV_APEC PUBLIC ECONOMICS The honeybee occasionally needs Find a new place for a nest. The swarm sends out scout bees To look for a new location WHAT METHOD THE BEES USE? §First the researchers thought bees prefered unanimity. § § §Then they observed that only a quorum is sufficient – 30 bees out of 75 bees at a potential nest site. 20.10. 2015 BPV_APEC PUBLIC ECONOMICS HOW TO REWARD BUREAUCRATS? 20.10. 2015 BPV_APEC PUBLIC ECONOMICS C:\Users\216776\Documents\Public economics\how to pay the bureacrat.jpg §There are huge differences between countries: § §Top pay for elite work § §Strict seniority § §Project management § 20.10. 2015 BPV_APEC PUBLIC ECONOMICS CAN WE OR GOVERNEMENT PUNISH BUREACRATS IF SOMETHING GOES WRONG? §Most projects end behind schedule. § §Also more expensive and less useful then expected initially. § §What exactly would we punish? 20.10. 2015 BPV_APEC PUBLIC ECONOMICS WHAT TO DO WHEN A BUEROCRAT FAILS? Jay, Antony, and Jonathan Lynn. "A Question of Loyalty." Yes, Minister. Prod. Peter Whitmore. BBC. S02E07, 6 Apr. 1981. Television. https://www.youtube.com/watch?v=JU68wBR4pjQ 20.10. 2015 BPV_APEC PUBLIC ECONOMICS