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Public choice theory addresses this key question.
How does the democratic process lead to collective economic choices?
This area of Microeconomics is important because it helps explain how
the principles of Economics are applied in the real world of government policy making,
often well but sometimes very poorly.
And in this last module, we're going to take a quick spin around the public choice block.
Starting with a look at one very interesting model of voting behavior,
based on micro-economic insights,
the median voter model.
The median voter model
was one of my favorite key concepts in all of public choice theory.
This is because this model helps explain why in two-party political systems,
such as exist in democracies like the United States and Great Britain,
the winning candidates will typically represent
the political center rather than the right wing or left wing extremes.
To understand the median voter model,
we should first define the words median voter.
This is the person holding the exact middle position on any issue.
To illustrate, consider this figure that depicts the preference of the median voter,
B sub M, on the size of the national budget.
Note that exactly half of
the population to the left of this voter prefers a smaller budget.
And the smaller the preferred budget,
the more conservative the right wing position is considered to be.
Note also that exactly half of the population to the right prefers a larger budget.
The larger the budget,
the more liberal or left wing the position is considered to be.
Suppose now, there are two candidates running for prime minister in Great Britain,
the Conservative Party candidate and the Labor Party Liberal candidate.
And suppose further that the Labor Party candidate
initially takes a left wing position represented
B sub L for a budget that is actually much larger than the median voter's preference.
So, what is the best position for
the Conservative Party candidate to take to win the election?
Let's pause now as you frame your answer.
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Well, assuming the size of the budget is the defining issue of the campaign,
all the Conservative candidate needs to do to win is to take a position
somewhere between the median voter and the Labor Party candidates position,
such as B sub C. At B sub C,
the Conservative candidate would attract
those 50% of the voters to the left of the median voter,
plus the voters represented by
B sub C minus B sub M. And if the Conservative were to take such a position,
the Liberal would lose the election in a landslide.
Of course, the Labor Party candidates pollsters may be smart enough to
figure out that their candidate has been outflanked during the campaign,
and thereby advise their candidate to leapfrog the Conservative position
by moving to B prime sub L. Now, you can see,
of course, that the Conservative might then move to B prime sub C,
and so it will go until both candidates effectively hug the median voter position.
And from this example,
it should be obvious how a primarily two major party system,
such as the ones in Great Britain and in the United States,
moved political outcomes to the political center.
More broadly, it is for this reason we often
observe political candidates taking very similar positions.
Essentially, becoming what one political wag in America once called
enormous Alice in Wonderland, Tweedledum and Tweedledee.
Of course, there are
a number of other interesting voter behavior models in public choice that you may
encounter if you take additional courses in either economics or political science.
For example, public choice theory explains the process of logrolling in politics.
This involves the well-known practice of reciprocal vote trading
among politicians for each other's proposed legislation.
For example, a dovish American congressman might vote for an increase in
the defense budget in exchange for a promise from a hawkish American congressman,
to approve a new public works project in the dov's home district.
The broader point of delving into this public choice here is to
reinforce one of the broad themes of this course here.
As I have said before,
and it is well worth repeating,
when you are in business, the laws,
regulations, rules and taxes of government
can often do more harm to your business than any 10 competitors.
And that's why it is particularly important to understand
government policy from an Economics and Public choice point of view.
For example, your company may face a regulation or
a tax and micro-economic analysis
may reveal to be totally inefficient and counterproductive.
Armed with that analysis,
it will be much easier for your firm and lobbying team to
argue against the proposed regulation of tax on public interest grounds,
rather than just opposing
the policy change because it might hurt your company's bottom line.
Of course, in other cases,
the proposed new policy may be totally justified on economic grounds.
For example, a tax hike may be necessary to pay for new roads,
so your business can transport its products faster.
In such a case,
your firm may find it more beneficial to work with
the government to implement the tax in the fairest possible way.
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And anyway, I hope you've enjoyed this course in the Power of Microeconomics.
I've tried over the course of our 10 lessons together to wed economic
theory with actual real world and business examples, and applications.
And I've tried to do that to help you better understand the solid understanding
of economics is critical to both your professional and personal futures.
I also hope that if you haven't yet taken the course yet,
you will join me in the companion course to this series,
the Power of Macroeconomics.
This course will move us from the micro world of
individual markets to the big quite literally macro questions related to jobs,
growth, inflation and trade in the global economy.
And in addressing those big questions,
I will offer you some very important insights about how to strategically manage
a business or an enterprise over the course of the ups and downs of the business cycle.
So with that, I will sign off here.
I hope to see you again soon in the Power of Macroeconomics.
I'm Peter Navarro from the Merage School of Business,
the University of California Irvine.
Dr. Peter NavarroProfessor
