Class notes
Chapter 6 - Public choice theory
- Course
- EKN 310
- Institution
- University Of Pretoria (UP)
Public choice theory
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Chapter 6Public choice theory
6.1 Introduction
Investigating social choice rules → methods of transforming individual choice into
public choices → making sure the optimal amount of people at the lowest level of an
economy are being heard → transferring individual needs and information into
collective needs to maximise welfare.
Dictatorial rule → one person (the leader of society) is consulted.
Can lead to an abuse of power.
Does not represent the wants and needs of the community.
Voting rules:
Unanimity → a decision requires 100% support before it is implemented →
everyone in a society must agree on the decision.
Ordinary majority rule → 50%-plus-one-vote is required for a decision to be
accepted.
Optimal voting rule → variation of the ordinary majority rule.
6.2 Unanimity rule and the Rawlsian experiment
Unanimity → each individual needs to support the process → becomes a collective
decision of the community.
This is the only voting rule that leads to a Pareto-optimal solution.
Rawlsian experiment:
Focuses on the process by which individuals reach unanimity.
Sets the conditions under which “free and rational” individuals will choose
certain principles of justice that govern the “basic structure of society”.
, The “social contract” that emerges is a case of “justice in fairness”.
Process:
o Individuals pass through a “veil of ignorance” into an “original position”.
Veil of ignorance → people become unaware of their position in
society (they do not know if they are rich or poor)
This makes everyone equally risk averse → makes people
rethink whose needs come first.
If you do not know if you are the poorest and therefore
will want to maximise the utility function of the lowest
person in society)
o Social welfare function depends on the lower of two individual utilities
→ 𝑊=𝑚𝑖𝑛𝑖𝑚𝑢𝑚(𝑈𝑎,𝑈𝑏) so if 𝑈𝑎 > 𝑈𝑏 then 𝑊=𝑈𝑏
Implies → to increase W, Ub must increase.
NOTE! Ua can also increase just as long as Ub does as well.
Rawlsian welfare function → consistent with a Pareto-based policy →
benefiting both parties involved.
𝑊=𝑚𝑖𝑛𝑖𝑚𝑢𝑚(𝑈𝑎,𝑈𝑏) → implies that all parties in the original position adopt a
“maximum strategy” → this strategy gives priority to the party who is in the
worst-off position (has the minimum utility in society).
o Protects them if they were to end up in that position → they will act in
the best interest of the individual with the lowest utility as it may be
them.
Outcome:
o Government should implement policies that aim to benefit the poorest
individual in the society → done regardless of whether it harms or
makes other individuals worse off.
Good example of Bergson criterion for welfare improvement → if
social welfare is increased as a whole, it does not matter if some
people are left worse-off.
o Gives minorities the veto right → the last unpersuaded voter has a
decisive vote.
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