[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Table 17.1
VOTING PREFERENCES
Jessica’s Ralph’s Brutus’s
preferences preferences preferences
First choice: Young and Romantic Third and Goal to Go Automatic Avengers
Second choice: Third and Goal to Go Automatic Avengers Young and Romantic
Third choice: Automatic Avengers Young and Romantic Third and Goal to Go
COLLECTIVE DECISION MAKING
A fourth important reason for public failures relates to how government decisions
get made. Governments are not always consistent in their actions. This inconsistency
may not be surprising, given that government choices do not reflect the preferences
of a single individual. More fundamentally, majority voting may not yield a
determinate outcome even when only three people choose among only three alternatives,
as was noted more than two hundred years ago by the Frenchman Marquis
de Condorcet—a phenomenon referred to as the voting paradox. Consider the
simple example of three people who want to go to a movie together. They have
narrowed their choices down to three possibilities, which they rank as shown in
Table 17.1.
When they compare each of the films, they find that Young and Romantic is preferred
over Third and Goal to Go by a two-to-one margin and Third and Goal to Go is
preferred to Automatic Avengers, also by a two-to-one margin. Taking this information
alone, they might reason that—since Young and Romantic is preferred over Third
and Goal to Go and Third and Goal to Go is preferred over Automatic Avengers—Young
and Romantic is also preferred to Automatic Avengers. But when they put it to a vote,
they find that Automatic Avengers is preferred to Young and Romantic by a two-toone
margin. There is no majority winner. Majority voting can compare any two of
these choices but is incapable of ranking all three of them.
The Nobel laureate Kenneth Arrow proved an even more remarkable result. All
voting systems (two-thirds majority, weighted majority, or any other), under some
circumstances, yield the same kind of indecision. Inconsistencies are simply inherent
in the decision-making process of any democratic government. The only way
around this problem is to entrust a single individual with all decisions. Such a system
yields consistent choices but is hardly democratic!
Economists have looked carefully at how political processes are affected by
incentives—for example, the incentives of politicians, of political parties, of government
bureaucrats, and of special interests to curry favor with these political actors
to influence legislation. Public choice theory is a branch of economics that analyzes
the outcomes of political processes, assuming that each of the participants acts
rationally. James Buchanan of George Mason University received a Nobel Prize for
his contributions in developing public choice theory. As an understanding of how
394 ∂ CHAPTER 17 THE PUBLIC SECTOR