EKN 310
Chapter 6 – Public Choice Theory
Introduction
In this chapter, we will look at how public decisions are made. Public Choice
Theory applies economic principles to investigate how individual preferences are
transformed into collective social choices.
• Social Choice Rule: A systematic method for aggregating individual
preferences into a single public decision.
• Doctorial Rule: A rule where the ethical views of a single leader or central
group are imposed on society; while straightforward, it historically leads to
abuse of power and is generally rejected as a desirable rule.
• Voting Rules: In modern democracies, collective decisions are reached
through mass participation, ranging from the unanimity rule (requiring 100%
agreement) to the ordinary majority rule (requiring 50% plus one) and various
optimal voting rules.
The Unanimity Rule and Rawlsian Experiment
The Unanimity Rule =
Each member in a community must support the proposal before it becomes the
collective decision.
This rule is unique because it is the only voting rule that consistently leads to a
Pareto-optimal solution, as every decision must be in the interest of all parties
involved.
• The Rawlsian Experiment: John Rawls (1971) proposed a normative
theory to determine the principles of justice that govern society. This
experiment focuses on the process by which individuals reach unanimity.
, • The Process:
- Individuals are imagined entering a hypothetical “original position”
- after passing through a “veil of ignorance”.
- By doing so, each party is able to rid itself of all prejudices and prior
knowledge.
- In this state, they are unaware of their future place in society, social
status or even personal well-being, making them equally risk-averse.
• The Social Welfare Function: Behind the veil, individuals choose a
welfare function that protects them against the worst possible outcome
(risk-adverse) : W = minimum (Ua, Ub)
- The welfare function depends on the lower of the two individuals
utilities; if Ua> Ub then W= Ub
- Thus for W to increase, there must be an increase in Ub.
• Maximin Strategy: All parties in the original position adopt a maximin
strategy which gives priority to the party that is potentially worse oW,
ensuring they have protection regardless of their eventual position in
society.
• Disadvantages of Unanimity:
o High costs – reaching a consensus may take a very long time and is
extremely time-consuming, high opportunity costs. (e.g. the drawn
out South African constitutional negotiations)
o Veto Power – It eWectively grants every single voter a right of veto,
which can allow a tiny minority to control the outcome.
o Strategic Action – It may encourage individuals to withhold their
support to bargain for special benefits, often leading to logrolling
9vote trading).
Majority Voting and the Median Voter Theorem
Ordinary majority rule =
Every individual is given one vote and the issue receiving the most votes wins.
This is the most common social choice rule, requiring “50 percent plus one” to
pass a proposal.
Chapter 6 – Public Choice Theory
Introduction
In this chapter, we will look at how public decisions are made. Public Choice
Theory applies economic principles to investigate how individual preferences are
transformed into collective social choices.
• Social Choice Rule: A systematic method for aggregating individual
preferences into a single public decision.
• Doctorial Rule: A rule where the ethical views of a single leader or central
group are imposed on society; while straightforward, it historically leads to
abuse of power and is generally rejected as a desirable rule.
• Voting Rules: In modern democracies, collective decisions are reached
through mass participation, ranging from the unanimity rule (requiring 100%
agreement) to the ordinary majority rule (requiring 50% plus one) and various
optimal voting rules.
The Unanimity Rule and Rawlsian Experiment
The Unanimity Rule =
Each member in a community must support the proposal before it becomes the
collective decision.
This rule is unique because it is the only voting rule that consistently leads to a
Pareto-optimal solution, as every decision must be in the interest of all parties
involved.
• The Rawlsian Experiment: John Rawls (1971) proposed a normative
theory to determine the principles of justice that govern society. This
experiment focuses on the process by which individuals reach unanimity.
, • The Process:
- Individuals are imagined entering a hypothetical “original position”
- after passing through a “veil of ignorance”.
- By doing so, each party is able to rid itself of all prejudices and prior
knowledge.
- In this state, they are unaware of their future place in society, social
status or even personal well-being, making them equally risk-averse.
• The Social Welfare Function: Behind the veil, individuals choose a
welfare function that protects them against the worst possible outcome
(risk-adverse) : W = minimum (Ua, Ub)
- The welfare function depends on the lower of the two individuals
utilities; if Ua> Ub then W= Ub
- Thus for W to increase, there must be an increase in Ub.
• Maximin Strategy: All parties in the original position adopt a maximin
strategy which gives priority to the party that is potentially worse oW,
ensuring they have protection regardless of their eventual position in
society.
• Disadvantages of Unanimity:
o High costs – reaching a consensus may take a very long time and is
extremely time-consuming, high opportunity costs. (e.g. the drawn
out South African constitutional negotiations)
o Veto Power – It eWectively grants every single voter a right of veto,
which can allow a tiny minority to control the outcome.
o Strategic Action – It may encourage individuals to withhold their
support to bargain for special benefits, often leading to logrolling
9vote trading).
Majority Voting and the Median Voter Theorem
Ordinary majority rule =
Every individual is given one vote and the issue receiving the most votes wins.
This is the most common social choice rule, requiring “50 percent plus one” to
pass a proposal.
