PE powerpoint Part BW 4

PE powerpoint Part BW 4 - Public Economics Principles and...

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Public Economics Principles and Practice Part 4 Public Choice Peter Abelson Applied Economics and University of Sydney
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Public Choice “Textbook discussions of market failures and their remedies tend to convey a rather rosy view of government. With a tax here, an expenditure there, the state readily corrects all market imperfections, meanwhile seeing to it that incomes are distributed in an ethically desirable way. Such a view is at variance with apparent widespread dissatisfaction with government performance . . .... Humorist P.J.O’Rourke probably summarised the sentiments of many when he quipped, ‘Giving money and power to government is like giving whisky and car keys to teenage boys’”. (Rosen, 2002, p.106)
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Issues in Public Choice Direct democracy: how can individuals jointly, usually by a voting process, make good collective choices? Indirect representative democracy: what happens when citizens require representatives and political institutions to make collective decisions on their behalf? Public choice is the field of study that tries to answer these questions. Adopts economic method: outcomes are viewed as a function of the objectives of the actors, the constraints and the institutional settings.
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Chapter 9 Public Choice and Individual Values Unanimous Social Choice Other Collective Choice Methods Arrow’s General Impossibility Theorem Conclusions
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Unanimous Social Choice Unanimity, coercion costs and tax prices For pure public goods, each voter gets same quantity. Unanimity (Lindahl solution) requires that voters with different preferences pay different prices. Examples Figure 9.1 and Table 9.1 Difficulties: free riding (strategic declarations) and transaction costs Problems increase with large numbers
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Efficient provision of a public good
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Unanimous agreement
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Other Collective Choice (Voting) Methods Optimal majority rule: the majority vote required to minimise the sum of coercion costs and decision costs. See Figure 9.2 Optimal majority varies with decisions required
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An optimal majority
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Most common, practical, and fair (one vote / person). But various problems arise
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PE powerpoint Part BW 4 - Public Economics Principles and...

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