Public Choice In a Representative Democracy

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Median voter‘s utility

Figure 4.13: Options for the budget maximising agenda setter

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

Comparison between publicly and privately provided services (Mueller, 2003, pp. 373-380)

20 sectors are subject to the comparison:

1)Airlines

2)Banks

3)Bus and transit service

4)Cleaning services

5)Debt collection

6)Electric utilities

7)Fire protection

8)Forestry

9)Hospitals and nursery services

10)Housing

11)Insurance business

12)Ocean tanker repair and maintenance

13)Railroads

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

14)Refuse collection

15)Saving and Loans

16)Schools

17)Slaughterhouses

18)Water utilities

19)Weather forecasting

20)Industrial companies

In general, private provision is more efficient and saves costs for the public!

Public firms invest more; higher capital intensity.

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

e) The Government as Leviathan

One can even extend the model in that sponsor and bureau is interpreted as one joint unit ”monolith monopolist”.

Government in this view is looked at as a malevolent budget maximiser rather than a benevolent public good provider.

If this view has a point, a the normative solution is to reduce discretionary power of governments by meass of a constitution veil of uncertainty.

Figure 4.17 shows that the Leviathan would impose a higher tax on the citizen if he is free to choose.

Consequences for the theory of optimal taxation!

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

© Freytag 2013

Earned

Income

A

C U3

G

E

Public Choice

Figure 4.14: Alternative strategies for taxing income and leisure

U1

U2

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

Government as Leviathan – empirical evidence

The empirical literature has focused on the systems of checks and balances:

• constitutions constrain the legislature,

• federal structures are opposing huge governments,

• application of the subsidiary principle diminishes government size,

• intergovernmental competition does alike,

• government collusion (log-rolling on the EMU level) increases government size.

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

f) Regulatory capture*

Bureaus do not only provide public goods. They also are responsible for regulation in the case of market failure.

As shown above, the regulated sector normally benefits from regulation; prices are between competitive and monopolistic outcome.

Therefore, it makes sense for interest groups to stay in close contact with the regulatory office.

At the same time, the regulatory office gains its status only by regulation. It is not in its interest to give up regulation, even if market failure cannot be observed any longer.

* Stigler, George J. (1971), The Theory of Economic Regulation, The Bell Journal of Economics and Management Science, Vol. 2, S. 3-21.

Andreas Freytag

1.Introduction

2.Origins of the State

3.Public Choice in a Direct

Democracy

4.Public Choice in a Representative Democracy

5.Application of Political

Economy Models

6.Normative Public

Choice

Public Choice

It is sensible to assume the position of the regulated industry.

The bureau is captured by the industry. Consequences include longer and heavier regulation than needed for, job offers for regulators in the very industry.

Potential examples:

Coal mining industry Ministry of Economic Affairs

Telecommunication incumbent communication regulator

Insurance industry financial regulator

Utilities energy regulator