Government Failure and Public Choice
Government intervention may be prescribed to correct for market failures (e.g., externalities, asymmetric information, natural monopolies) or achieve normative social goals. However, government intervention poses its own problems. Once enacted interventions are hard to remove even after they have outlived their usefullness. Moreover, governments are plagued by inherent problems in making democratic decisions and designing organizations that do in fact achieve their objectives.
THE FAILURE OF REPRESENTATIVE GOVERNMENT
Democratic choice may fail to reflect collective interests. Conflicts occur when government actors must choose between actions that reflect the preferences of their constituents (i.e. voters and interest groups) and actions that advance their conception of the public good (i.e. their normative interests).
THE FAILURE OF BUREAUCRATIC SUPPLY
Government organization that do not buy or sell goods in the market place may fail to value their outputs and resources appropriately. As a result, the marginal benefits of resources used may not reflect their marginal costs and resources may be misallocated. At the same time, government agencies may use resources to achieve non-efficiency goals. Thus, what appears to be a misallocation from an economic perspective may be appropriate from a normative or political perspective when efficiency concerns are not the primary motivation in the allocation of resources.
THE FAILURE OF DECENTRALIZATION
While decentralization and federalist policies may improve implementation by allowing local flexibility and experimentation, vague lines of authority and inter-agency competition for control of an initiative may slow and even prohibit implementation. Furthermore, decentralization may make monitoring and program evaluation difficult if not impossible and may attenuate government accountability.
THE FAILURE OF DIRECT DEMOCRACY
Decision-making rules are some of the most important policies analysts will be asked to evaluate. Public choice theory exposes some of the inherent flaws with common democratic techniques used to aggregate individual preferences. The inherent difficulties of designing collective choice mechanisms that are both rational and fair are demonstrated by (1) (1) the voter's paradox, (2) the median voter theorem, and (3) arrow's impossiblity theorem.
THE VOTER'S PARADOX
Under a majority voting rule, the voting preferences of individuals do not neccessarily aggregate into a clear social or group preference. Individuals may have clearly ordered (i.e. transitive preferences), but their group preferences may be intransitive. In other words, although each individual voter may have a clear preference, there is no obvious group preference. As a result, the outcome to a majority vote may be subject to cycling and agenda manipulation. Individuals can get their most favored outcome to win the majority vote by contesting the initial decisions and changing the order in which group members vote for each pair of alternatives.
THE MEDIAN VOTER THEOREM
When alternatives being considered represent a single characteristic (e.g., more or less money; more or less liberal) and individuals preferences are single-peaked (i.e. they have a first choice and any movement away from that choice reduces their satisfaction), then the outcome of majority voting will reflect the preferences of the median voter.
PUTTING IT TOGETHER
Majority voting rules will only yield consistent public choices when voter's preferences are single-peaked and when alternatives are uni-dimensional. When alternatives are multi-dimensional (i.e. there are multiple characteristics of the choice that affect a voters preference for it), preferences will tend to be multi-peaked. Multi-peaked preferences are more likely to lead to cycling and agenda manipulation.
Using these theories we can conduct studies to determine the demand for public goods in a community and the affect that changes in public funding strategies (e.g., subsidies and taxes) would have on demand.
ARROW'S IMPOSSIBILITY THEOREM
If majority voting systems are inherently flawed, is there any optimal voting scheme? Is there any fair and ethically acceptable method of translating individual preferences into collective preferences that doesn't have problems?
Kenneth Arrow proposed the following criteria for an optimal method of preference aggregation:
Dr. Arrow found that it is impossible to find a voting mechanism that is consistent with all five of these criteria. If any 4 criterion are met, the fifth will be violated. This does not mean that society cannot make consistent decisions. It can. However, special conditions must be met for this to happen. For example, if all inidividuals in society had the same preferences, Arrow's criterion would not be violated and a majority voting rule could be adopted to translate individual preferences into collective action.
- Unrestricted Domain: It can produce a decision whatever the configuration of preferences. Alternatives with multiple dimensions and preferences with multiple peaks are acceptable.
- Transitivity: All possible outcomes can be ranked and if A is prefered to B and B is prefered to C, then A should be prefered to C.
- Unanimity: It must be responsive to individuals' preferences. This follows from the pareto-criterion. If everyone preferes A to B, the group should prefer A to B.
- Independence of Irrelevant Alternatives: Societies ranking of A and B depends only on individuals' rankings of A and B. Thus, societies preference for defense spending and health spending doesn't depend on how individuals' rank either of these spending categories relative to educational spending.
- Non-Dictatorship: Social preferences that are based on the preferences of a single individual are not allowed.