Econ 132, Foldvary, Public Finance
Holcombe, chapter 8, public sector demand
Why do we have the tax system we have.
Who wants it?
p. 155: The median voter model
The median voter: for a single issue, a linear position range
Typical bell-shaped curve.
The position where half want more and half want less is the median.
Single-peaked preference.
Example military 5% of GDP, $700B /y, 1/5 fed spending, 60% of discretionary
The median voter theorem:
majority rule will produce the outcome preferred by the median voter.
The median voter is decisive.
Harold Hotelling: median location.
With two parties, competition for votes brings the candidates to the centers.
That is why with two major political parties, candidates tend to move towards the center.
When they don’t, such as with Goldwater 1964, McGovern 1972, they lose big.
In actuality, we have several parties on the ballots.
The median voter may not represent the optimal policy.
Minority views are not given much weight by the media.
Where a single candidate is elected by majority vote, there tends to be two major political parties.
The establishment parties make it costly to get on the ballot.
Challenger party candidates do not get invited to debate.
The media attention is on the campaign rather than on issues.
In elections voted by party, there are often several parties, who form coalitions.
It can be a tyranny of the majority.
p. 163: the Cyclical Majority
The Condorcet voting paradox for muliple-peaked preferences.
Marquis de Condorcet (1793-94)
Suppose 3 outcomes: A, B, C
Group 1 2 3
% 35% 45% 20%
1st choice A B C
2nd choice B C A
3rd choice C A B
A > B, B > C, C > A
Not transitive, not consistent
There is no single outcome desired by the majority.
Those who set the agenda can shape the outcome.
The agenda:
the choices and their order, presented to voters.
Voting can cycle from one outcome to another to another.
Kenneth Arrow.
Arrow's impossibility theorem.
Rules for a good democracy:
1. If all want X, we get X.
2. Transitivity.
3. Independence from irrelevant elements.
(A > B independent of C.)
4. No dictator.
Arrow: no voting system can satisfy all these criteria.
The Condorcet voting paradox.
Marquis de Condorcet (1793-94)
Suppose 3 outcomes: A, B, C
Group 1 2 3
% 35% 45% 20%
1st choice A B C
2nd choice B C A
3rd choice C A B
A > B, B > C, C > A
Not transitive, not consistent
There is no single outcome desired by the majority.
Those who set the agenda can shape the outcome.
The agenda:
the choices presented to voters.
Voting can cycle from one outcome to another to another.
Kenneth Arrow. Arrow's impossibility theorem.
Rules for a good democracy:
1. If all want X, we get X.
2. Transitivity.
3. Independence from irrelevant elements.
(A > B independent of C.)
4. No dictator.
Arrow: no voting system can satisfy all these criteria.
p. 166: information and incentives
Optimal ignorance of voters:
it's not worth knowing better.
In an election with millions or many thousands of voters,
the probability of one vote determining the outcome is almost zero.
Informed voting is a big positive externality.
Ignorance breeds apathy, and
apathy breeds ignorance.
The tyranny of the minorities.
Special interests with clout.
Caused by:
concentrated interests,
spread out costs.
Creates a market for legislation.
Example: sugar growers.
Subsidy: high benefits for the few big growers.
Cost: higher price for sugar. But per-capita cost is low.
Policy: sugar quotas. Too costly to oppose.
Losers: consumers, workers. Lifesavers moved to Canada.
Taxpayers pay for subsidies.
Society pays the deadweight losses, waste,
inefficient use of resources.
Special interests get:
subsidies, protection from competition
special privileges
Deadweight losses > $1 trillion. Optimal policy: blocked.
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