Public Choice Economics

Students participate in a series of classroom elections to analyze special-interest effects and see how the costs of voting and acquiring information about candidates or propositions on a ballot affect whether or not people vote, and, if they do, how informed they will be. Students examine the causes and consequences of logrolling and other collusion by elected officials. Finally, students determine whether Indianapolis’s Lucas Oil Stadium is an example of public choice theory in action.

COMPELLING QUESTION

Does voting always result in the best choice?

Economist James Buchanan won the Nobel Prize in Economics in 1987 for pioneering work he had done with Gordon Tullock and others in the new field of public choice economics. This approach applies the basics of an economic way of thinking to decisions made through the electoral process or by a government body. That means thinking of voters, elected officials, and government employees as people pursuing their own self-interest rather than pursuing the public good—even when that entails personal sacrifices. Before Buchanan’s work, most philosophers, political scientists, and many economists had not systematically applied economic thinking to the public sector except to decry individual cases of corruption or bribery.

What is really different about public choice economics is the rigorous study of how people in the public sector systematically respond to economic incentives. That seems like a very simple idea—in fact, when the idea was summarized in the press after James Buchanan won the Nobel Prize, many wondered how the idea could merit such a prestigious award. The answer is that it is often difficult and complex to trace the many ways this simple idea presents itself in realworld settings. Allegations of public officials’ self-interested behaviors are frequently denied, and evidence is normally covered up by people who want to keep self-interested behaviors hidden from the electorate.

The study of self-interest can lead to surprising insights in the hands of economists as skilled as Buchanan. He (and other public choice economists and political scientists) used it to identify concepts and issues such as special-interest effects, voters’ “rational ignorance,” declining voter registration and turnout, inconsistencies in election results and voter preferences, the importance of controlling agendas when inconsistent outcomes are possible, and models of how candidates package themselves to be successful in various elections, and how they bargain to get what they want once they are elected. Taken together, all of these public choice ideas work into a theory of government failure that can parallel economists’ work on market failures.

Government policies are often used to deal with market failures, so the idea of systematic government failure raises the question: Can we depend on government actions to correct for market failures?

Economists’ answer to that question is a firm “It all depends.” It depends on whether the expected benefits of a policy are greater than the expected costs. Public choice models show that those costs must include regular— and often substantial—provisions for government failures. We see that the very reasons markets fail to provide the right amounts of certain goods and services are likely to make it difficult for the government to determine and implement policies to solve those problems.

Public choice models provide an argument for maintaining a limited role of government in a market economy on one hand, while encouraging searches for legal and constitutional solutions to limit certain kinds of government failure on the other. For example, constitutional amendments imposing term limits and requiring a federal balanced budget are two solutions often proposed; there is a great deal of debate about the economic and political desirability of such reforms.

Although this lesson focuses on applying public choice theory to voting and elections, these ideas can also be used to explain the day-to-day actions of ordinary government employees and politicians. Public choice ideas are increasingly common in economic courses in colleges and high schools.

This lesson was originally published in CEE’s High School Economics, 3rd Edition.
Visit https://store.councilforeconed.org/ for more information on this publication and how to purchase it.

• Critically assess the actions of voters, elected officials, and government employees, based on the assumption that individuals in each of these groups will follow their own economic self-interest.
• Identify and evaluate the benefits and costs of alternative public policies, and assess who enjoys the benefits and who bears the costs.

• Slides 15.1–15.11
• Activity 15.1, one copy for every two students
• Activity 15.2, one copy for every five students in the class, cut apart so that each student receives one of the boxes on the sheet
• Activity 15.3, one copy per student
• Activity 15.4, one copy per student
• Logrolling Video https://www.khanacademy.org/humanities/us-government-and-civics/us-gov-interactions-among-branches/us-gov-structures-powers-and-functions-of-congress/v/earmarks-pork-barrel-projects-and-logrolling

1. Pose the Compelling Question to students. Explain that the purpose of this lesson is to examine the somewhat mysterious behavior of voters and elected officials from an economic perspective. Share the “mystery” with students and explain that this is an example of how an economic perspective might explain voting and politics: Imagine that a U.S. senator from the Northwest, known and respected for long years of service to voters, votes for a bill that will increase the demand for—and therefore the price of— U.S-grown lumber. Lumber is a product used to build new homes, and experts agree that passing this bill will increase the price of those homes. Senators from the Midwest oppose the bill but, eventually, it passes.
2. Ask students what might lead a respected senator from the Northwest and a majority of the Senate to pass a bill that will increase the price of new homes?
   Students may offer a variety of answers at this point, but push them to see that the senators may have been acting in their own self-interest.
3. Show Slides 15.1–15.3. Ask students to imagine that there are 1,000 timber producers in the United States and 1,000,000 people in the market for a new home. This bill would add about $100 to the cost of a new home. Ask: Who benefits from such a law?
   U.S. timber companies
   Ask: Who might be harmed by this new law?
   U.S. home buyers, construction companies
   Ask: Which group is likely to be larger?
   The group harmed by the new law
4. Show Slides 15.4 and 15.5. Explain that even though elected officials usually try to serve their constituents, not all of their constituents are equally interested in every law and policy adopted by elected officials. To stay in office, elected officials must get a majority of votes from groups of constituents interested enough in what they do to vote in the next election. Explain that a U.S. senator might decide to vote in favor of a bill that increased the price of new homes if he or she was persuaded that enough constituents would benefit from the higher demand for and price of lumber to remember this bill. On the other hand, some home-buying constituents would be hurt enough to resent the bill and vote against the senator. That can happen. For example, a senator from the Northwest might favor an increased tariff (a tax on imported goods) on imported lumber to protect U.S. timber companies from Canadian competitors. U.S. timber companies and workers constitute a small group that is likely to remember and vote for (or send campaign contributions to) the senator who supported the tariff. Higher costs of new homes will be spread across millions of families all around the country, who may not realize that the tariff has caused new home prices to be higher. They aren’t likely to vote or campaign against those legislators who voted for this policy, or vote for and support those who voted against it.
5. Show Slide 15.6. Explain to the class that this kind of outcome (policies that produce more public costs than benefits) constitutes a government failure. Specifically, this failure results from a special-interest effect.
6. Tell the class that you are going to use simulated elections to see how outcomes that are not in the public interest can happen—even in democratic political systems. Divide the class into five groups with equal numbers of students in each group. Leftover students can help you count votes and make payouts after the elections, or partner with another student and participate as one.
7. Explain that there will be at least two elections and that, in each, students will vote for one of two options that offers some level of benefits to society—in this case, all the students in the classroom. Explain that the most important rule for these elections is that everyone votes according to his or her own self-interest. Make sure students vote in a manner that earns them the most money. “Payouts” of classroom money are assumed to fully value each person’s satisfaction and personal benefits from voting for and perhaps electing a candidate or adopting a policy. Everything they care about in this election is reflected in the payout schedules. Payouts are to be recorded as changes on the students’ bank-account sheets in Activity 15.1. Tell students that payouts will be made after each election, based on the schedule of the policy chosen by the majority of voters.
8. Before conducting the first election, give each student a bank statement from Activity 15.1. Tell students that each of them has $25 in the bank to cover costs associated with choosing to vote. Next, distribute the cut-apart information sheets for Activity 15.2. Give the portion of Activity 15.2 marked Group 1 to each student in Group 1, the portion marked Group 2 to each student in Group 2, and so on for all five groups. Note that each student should receive information only about his or her own group’s benefits from Options A and B, not about the benefits for students in other groups. Give students a minute to review the information. Check with several students to make sure that they are reading the information sheets correctly in terms of their expected benefits from election outcomes.
9. Conduct Election 1. Ask students to raise their hands to indicate if they are voting in favor of Option A or Option B. Record the election result on the whiteboard. Make the payouts according to the information sheets. Pay each student in each group the payout indicated for the winning option on the student information sheets; just add the appropriate deposit to each student’s bank statement. You and a student helper should be able to quickly add the correct amounts to the accounts for each student. Tell students to update their bank balances.
10. Direct students’ attention to the results of Election 1 you recorded on the whiteboard; show Slide 15.7. Have students work in pairs. Ask:
    1. What are the total benefits paid out to one representative from each of the five groups if Option A is chosen?
       $11
    2. What are the total benefits paid out to one representative from each of the five groups if Option B is chosen?
       $10
    3. If each of the five groups has the same number of voters, will Option A or Option B be chosen?
       Option A will be chosen because students in Groups 3, 4, and 5 should vote for A.
    4. Why did Option A defeat Option B in Election 1?
       When everyone votes her or his own self-interest, Option A defeats Option B because students in Groups 3, 4, and 5 earn more money by voting for Option A, and students in Groups 1 and 2 earn more money by voting for Option B.
    5. Did Election 1 result in the greatest amount of social benefits?
       Yes. In Election 1 the total social benefits of $11 ($5 for each student in Group 5 plus $3 for each student in Groups 3 and 4) were chosen over total social benefits of $10, which would be paid out to students in Groups 1 and 2 if Option B won. But elections can result in outcomes that do not provide the greatest amount of social benefits.
11. Explain the procedures for Election 2. The same payouts used in Activity 15.2 will be used, but in Election 2, you will charge each voter $4 to vote. Explain that this is not a poll tax, which is illegal in the United States, but represents the costs of voting that, although often overlooked, really are paid by voters. These costs include information search costs, such as for time spent gathering information about the effects of Option A and Option B so that they can be informed voters as well as costs for driving or walking to the polling place, and the actual time it takes to vote.
12. Conduct Election 2. Ask students to stand if they are going to vote, and ask each standing student (or pair of students if they are sharing a vote) to debit $4 on their Activity 15.1 Bank Account Sheet. Then have students raise their hands to vote for Option A or Option B. Only the standing students who paid $4 get to vote. Record the election result on the board. Have the winning voters indicate their payouts as shown in the column for the winning option on the information sheets, and on Slide 15.8.
13. How should Election 2 turn out? If students followed the rules correctly, individuals in Groups 3 and 4 should choose not to vote. If they voted, point out that they spent more than they can expect to gain—not a good way to improve their bank balances. Individuals in Groups 1, 2, and 5 may or may not choose to vote, depending on how optimistic they are about winning the election. If students in Group 5 vote and students in Groups 1 and 2 do not, announce the outcome (Option A still wins). Repeat Election 2 with the benefits to Groups 1, 2, and 5 doubled and the benefits to Groups 3 and 4 remaining the same. Keep the cost of voting the same for everyone. Continue raising these benefits and offering hints to Groups 1 and 2, if necessary, until the students in these two groups vote together to defeat Group 5, or until Group 5 does not vote and either Group 1 or Group 2 votes to win the election. Make appropriate payoffs to all students (including those who choose not to vote) and collect the $4 from voters in each election. Record the result that Option B defeats Option A on the board.
14. Discuss the results of Election 2. Direct students’ attention to the results of Elections 1 and 2 on the board. Ask:
    1. Why did Option B defeat Option A?
       When voters recognized the costs of voting, it changed the outcome. Voters are more likely to vote if they expect to get a higher financial return from casting a winning vote or if they put more value on and derive more personal satisfaction from the act of voting.
    2. Did Election 2 result in the greatest amount of social benefits?
       No. In Election 2, when Option B won, the total social benefit of $10 was paid out to one representative from each of the five groups: $5 for Group 1 and $5 for Group 2. The total social benefit of $11 for Option A was defeated: $3 for Group 3, $3 for Group 4, and $5 for Group 5.
15. Explain that choosing B over A in Election 2 illustrates a special-interest effect—differences in the distribution of costs or benefits associated with an election outcome give groups of people strong incentives to organize, campaign, and vote, while a large portion of the electorate chooses not to vote or at least not to vote as a block. Remind the class that people incur time and money costs getting to the voting place and, to different degrees, in getting information to make an informed vote. These costs have the same effect in leading some people not to vote as the $4 charged in these simulated elections.
16. Discuss examples in which the specialinterest effect operates in U.S. elections or public policies (e.g., farm subsidies— despite the fact that only three percent of the population works on farms, trade protection in the form of tariffs, quotas, and voluntary export restraints provided to U.S. automobile and textile companies). Also discuss cases throughout history when voters or political leaders took a position that was not in their own self-interest. Examples include defenders at the Alamo and President Eisenhower signing the amendment limiting presidential terms. You might read to the class John F. Kennedy’s chapter on John Quincy Adams in Profiles in Courage or assign it as homework.
17. Explain that public choice economics assumes people allow self-interest to guide their political decisions and, to the extent that they do not, it illustrates a limit to the ability of public choice theory to predict their behavior. You may have observed that in Election 2, if some students choose to vote despite the fact that voting costs were higher than their expected gains. If it did occur, note the number of people guided by self-interest.
18. Optional activity. Ask students if democratic elections not facing special-interest problems will always result in outcomes that provide the most social benefits.
    Answers will vary, but the answer is no.
19. Show Slide 15.9. Tell students that there are no costs to voting in this election. Ask them to answer the questions on the slide (you may prefer to prepare slips for the five groups of students as in the earlier elections, and conduct this as a separate election or have students orally answer the questions, based on the information on the slide).
    1. Why did option A defeat option B?
       More received benefits from that option.
    2. Did this election result in the greatest amount of social (overall) benefit?
       No, because the benefits were concentrated for the minority, the option with the highest social benefit was not chosen.
20. Conclude the optional activity by noting that in this case, the option that provides the greatest overall level of social benefits will not be chosen in a democratic election in which everyone votes according to self-interest. The key point to stress here is that “Democracy is the worst system in the world, except compared to everything else,” as Winston Churchill said. Or, as has also been said about democracy, a majority of people will be right a majority of the time.
21. Show Slide 15.10.  If time, show video.   Logrolling and Pork Barrel Projects video
22. Distribute Activity 15.3: Logrolling Across the Land, and have students complete it.
23. Show Slide 15.11 and explain that understanding the basis of public choice economics helps illustrate other common political behaviors, such as logrolling.
24. Have students note the total costs and benefits of the defense contract and the farm subsidies on the slide. Ask:
    1. Which of these programs is economically efficient (the benefits exceed the costs)?
       Neither the defense contract nor the farm subsidy program is efficient, because the costs for both are $60 billion and the benefits are only $50 billion.
    2. If only these three senators are voting in a key Senate subcommittee and if majority voting is used, which of these programs is likely to be approved?
       A majority vote will result in both programs being defeated if the senators vote strictly on what is best for their own constituents, because the costs are greater than the benefits for both programs for the constituents of two of the three senators. Specifically, the Midwestern and Western senators would vote against the defense contract, and the Eastern and Western senators would vote against the farm subsidies.
    3. If you were the Eastern senator, how could you get one of the other senators to vote for the defense contract?
       The Eastern senator might approach the Midwestern senator and offer to vote for the farm subsidy program if, and only if, the Midwestern senator agrees to vote for the defense contract. Or the Midwestern senator might propose the same arrangement to the Eastern senator. If that happens, the benefits to the constituents in both the East and the Midwest will be $45 billion, and the costs $40 billion.
25. Explain that this logrolling could lead to both programs passing despite the fact that costs are greater than benefits for both. The Western senator can try to call attention to the “backroom deals” and “pork barrel” politics in an attempt to defeat the programs when a vote is taken in the full Senate. Or she can find a project that will benefit people in her district and “trade” her vote for one or both of these projects in return for the Eastern or Midwestern senators’ votes. And so the log rolls on.

Review the key points of the lesson. Explain that many factors can lead to systematic inefficiencies in government policies and programs: special-interest effects, voting costs that lead people not to vote in elections, information costs that lead most voters to be rationally ignorant about at least some of the issues they vote on, logrolling by elected officials, and other problems identified by public choice economists. Note that all of these problems can begin with voters, elected officials, and government employees pursuing their self-interest. That doesn’t mean there is no economic role for the government to play in a market economy. But it does add large costs to many government programs and, in that sense, supports the idea of a limited role for government in a democratic market system.

Multiple Choice

1. Vote trading between politicians is known as
   1. special-interest effect.
   2. logrolling.
   3. vote crowding.
   4. horsing around.
2. Special-interest effects are most likely to occur when
   1. the costs of voting are high.
   2. the costs of voting are low.
   3. the benefits of the vote are spread evenly among all voters.
   4. voting is required by law.
3. Which one of the following is not a cost of voting in the United States?
   1. Poll tax
   2. Time to research candidates
   3. Time to drive to polling station
   4. Lost wages due to time taken to vote
4. The following table shows the benefits to three voters of two election choices (expressed in dollars): Option A and Option B. Assume these three people are the only voters.
   

   Voter	Option A	Option B
   Sharmila	$7	$0
   Kuntal	$7	$0
   Monica	$0	$10

    

5. If each voter has an opportunity cost of voting equal to $8, then Option _____ will probably win the election. The option that is best for society overall is Option ______.
   1. A, A
   2. A, B
   3. B, A
   4. B, B

Constructed Response

Distribute Activity 15.4 and have students complete it. Have students determine whether Lucas Oil Stadium is an example of public-choice theory in action. Ask:

1. Who benefits from the State of Indiana and Indianapolis’s decision to use a variety of taxes to pay almost all of the construction costs of Lucas Oil Stadium?
   The benefits go to the Indianapolis Colts professional football organization, Colts fans, hotel owners in Central Indiana, and tavern and restaurant owners in the Indianapolis area. State legislators who voted for the tax received political and financial support from the groups that had strong financial interests in the stadium.
2. Are the benefits concentrated among relatively few people?
   Yes. The benefits go to the Colts, fans, some Indianapolis and Indianapolis Metro area businesses, and some politicians.
3. Who is hurt by the state decision to use a tax to pay for part of the construction costs of Lucas Oil Stadium?
   People who pay the higher local sales tax in the eight counties that surround the county in which the stadium was built— they pay taxes to support a stadium that most will never visit.
4. Are the costs spread out over many people?
   Yes. The population in the counties involved is more than 1.8 million people.
5. Do you think most of these taxpayers were deeply interested in the stadium issue? Is a tax revolt or anti-incumbent political backlash likely?
   To be sure, some taxpayers grumbled about paying for a service that they do not use—but most are not concerned one way or another. After all, the percentage increases in local sales taxes were a small part of their overall tax bill and total budget.
6. Is Lucas Oil Stadium a good example of public-choice theory in action?
   It appears to be. The state legislature responded to pressure from interest groups to deliver the stadium. A cost-benefit analysis suggests that the social benefits derived by fans and businesses are less than the overall social costs (the total additional taxes) paid by thousands of taxpayers, few of whom will ever visit Lucas Oil Stadium.