Holcombe 08

8CHAPTER

Public Sector Demand

PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe

PUBLIC SECTOR ECONOMICS: The Role of Government in the American EconomyRandall Holcombe 8-2

The Median Voter ModelThe Median Voter Model Concludes that a majority rule voting Concludes that a majority rule voting

system will select the outcome system will select the outcome preferred by the median voterpreferred by the median voter

Important assumptions:Important assumptions: Voters can rank alternatives along a Voters can rank alternatives along a

one-dimensional continuumone-dimensional continuum Voters have single-peaked preferences Voters have single-peaked preferences


The Median Voter Model: The Median Voter Model: Committee & Committee & Referendum Referendum


The Median Voter in a The Median Voter in a Representative Representative

DemocracyDemocracy Voters generally do not directly vote Voters generally do not directly vote

on issues in a representative on issues in a representative democracydemocracy

Voters choose the representative Voters choose the representative that has views that are closest to that has views that are closest to their owntheir own



DemocracyDemocracy Two representative modelTwo representative model Winning candidate needs to get the Winning candidate needs to get the

median voter to winmedian voter to win Political competition results in both Political competition results in both

representatives targeting the median representatives targeting the median votervoter



DemocracyDemocracy


The Decisive Median The Decisive Median VoterVoter

As long as preference assumptions As long as preference assumptions hold, model can be extended to any hold, model can be extended to any number of votersnumber of voters

Can be represented in a density Can be represented in a density function with positions from left to function with positions from left to rightright

More voters near the median voterMore voters near the median voter


The Decisive Median The Decisive Median VoterVoter


Application: Extreme Application: Extreme Candidates Cannot Win Candidates Cannot Win

ElectionElection


Application: Third Application: Third Parties Cannot PersistParties Cannot Persist


The Cyclical MajorityThe Cyclical Majority If preference assumptions are If preference assumptions are

violated, median voter’s preferred violated, median voter’s preferred outcome might not be selected by outcome might not be selected by majority rulemajority rule

Could produce a cyclical majorityCould produce a cyclical majority No single outcome can defeat all others No single outcome can defeat all others

by majority ruleby majority rule


Violation of Single Violation of Single Peaked PreferencesPeaked Preferences


Cycles and Political Cycles and Political InstitutionsInstitutions

If preferences are cyclical, political If preferences are cyclical, political institutions can effect electionsinstitutions can effect elections

Example:Example: Ford vs. Carter Ford vs. Carter Primary produces a unique winner, Primary produces a unique winner,

even with cyclical preferenceseven with cyclical preferences Political institutions help produce Political institutions help produce

stable outcomesstable outcomes


Information and Information and IncentivesIncentives

The political marketplaceThe political marketplace Most voters do not have direct inputMost voters do not have direct input

Voters are rationally ignorantVoters are rationally ignorant Individual vote is unlikely to affect the Individual vote is unlikely to affect the

outcomeoutcome Voters have little incentive to become Voters have little incentive to become

informedinformed


Special InterestsSpecial Interests Special interests have an incentive to Special interests have an incentive to

become informed because of become informed because of concentrated benefitsconcentrated benefits

Example:Example: dairy farmers dairy farmers Politicians have an incentive to favor Politicians have an incentive to favor

special interests over the public special interests over the public interestinterest


Information and Information and IncentivesIncentives

Special interests and rational Special interests and rational ignorance combine against the public ignorance combine against the public interest skew median voter demandinterest skew median voter demand Skew median voter demand toward Skew median voter demand toward

special interestspecial interest Tendency to support short-sighted Tendency to support short-sighted

policiespolicies


Public Sector Demand in Public Sector Demand in Theory and the Real Theory and the Real

WorldWorld Special interests and rational Special interests and rational

ignorance lead to government failureignorance lead to government failure Government failure leads to Government failure leads to

misallocation of resourcesmisallocation of resources Median voter model, like perfect Median voter model, like perfect

competition, helps provide insight competition, helps provide insight into the ideal system into the ideal system


Economic Efficiency and Economic Efficiency and the Median Voterthe Median Voter

Even if the median voter model Even if the median voter model holds, majority rule voting is not holds, majority rule voting is not likely to allocate resources efficientlylikely to allocate resources efficiently

The median voter’s equilibrium is The median voter’s equilibrium is efficient when the median voter’s efficient when the median voter’s share of total demand equals median share of total demand equals median voter’s share of total costvoter’s share of total cost


Economic Efficiency and Economic Efficiency and the Median Voterthe Median Voter

Holcombe 08

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