NPTEL-Economics-Public Economics

Module 5
DIFFICULTIES IN PUBLIC GOODS PROVISION
Lectures (21- 23)
Topics
5.1 Median Voter Theory
5.2 Potential Inefficiency of the Median Voter Outcome
5.3 Inefficiency of the Median Voter Outcome: Intuition
5.4 Representative Democracy: Vote-Maximizing Politicians
5.5 Vote-Maximizing Politicians
5.6 Median Voter Choice: Evidence
5.7 Assumptions of the Median Voter Model
5.8 Complication of Public Provision: Crowd Out
5.9 Optimal Second Best Provision of Public Goods
5.10 The Problem of Crowd-Out
5.11 Bergstrom, Blume, and Varian (1986) Model of CrowdOut
5.12 Private Responses to Public Provision: Partial Crowd-Out
5.13 Public Goods with Endogenous Private Provision
5.14 Empirical Evidence on Crowd-Out
5.15 Kingma 1989
5.16 Kingma 1989(Contd)
5.17 Hungerman 2005
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5.18 Andreoni 1993: An Experimental Test of the CrowdingOut Hypothesis

5.19 Andreoni 1993

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Module 5
Lecture 21
Topics
5.1 MEDIAN VOTER THEORY
When preferences are single-peaked, then majority voting will deliver a consistent
aggregation of preferences of the individual voters.
The Median Voter Theorem states that majority voting will yield the outcome
preferred by the median voter if preferences are single peaked.
The median voter is the voter whose tastes are in the middle of the set of
voters, so an equal number of other voters prefer more and prefer less of
the public good.
Voting equilibrium is characterized by preferred level of voter whose preferred
level of PG spending is at the median of the distribution
Compute preferred spending for each individual, Gh
Majority voting will select median of distribution of Gh

Figure 21.1

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5.2 POTENTIAL INEFFICIENCY OF THE MEDIAN

VOTER OUTCOME
Thus, the voting would suggest that the government only needs to find the
preferences of the median voter, and implement that level of public goods.
In general, median voter equilibrium is not Pareto efficient:
Suppose
Voting outcome:
Samuelson rule:

[Note that:

Difference between median and mean determines degree of inefficiency

5.3 INEFFICIENCY OF THE MEDIAN VOTER OUTCOME:

INTUITION
It does not account for intensity of preferences. So it does not follow that the
social marginal benefits equal the social marginal cost.
For example, if small numbers of individuals derive enormous benefits
from the public good, this should be accounted for in the total social
marginal benefits.
But in Median voter rule this is not accounted for.
For example, imagine that there are 1,001 voters in a town, who are considering
building a Road that costs Rs40.040 (Rs40/person).
Assume all 1,001 voters have single-peaked preferences, so the median
voter will determine the outcome.
If 500 citizens value the Road at Rs100 each, and the other 501 value it at Rs0,
then the social marginal benefit is Rs50,000, far greater than the cost.
However, the road doesnt get built.

5.4 REPRESENTATIVE DEMOCRACY: VOTEMAXIMIZING POLITICIANS

In practice, citizens do not vote on every bill; elect representatives to do so.

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In a standard (Hotelling) model, median voter theorem predicts that candidates

will implement median voter's preferences when elected
Move toward centre to win election
If politicians care about maximizing the number of votes they get, they
choose the outcome preferred by the median voter.

5.5 VOTE-MAXIMIZING POLITICIANS

Suppose the public good in question is education;
The key question is what fraction of the budget (say, 0% to 50%) should be spent
on education?
Voters are uniformly distributed on this continuum.
Two parties, A and B, are running for office and vying to maximize their votes.

Figure 21.2
A is trying to appeal to those who dont want much education spending, so he
places himself at A1. While B chooses a much higher level of education, B1. In
this case, the candidates split the vote equally.
But now imagine that A changes his position to A2. By doing so, A now gets a
majority of the votes.
But now imagine that B changes his position to B2 in response to A2. By doing so,
B now gets a majority of the votes.
This process will continue until the median voters preferences are arrived at.
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5.6 MEDIAN VOTER CHOICE: EVIDENCE

In a standard (Hotelling) model, median voter theorem predicts that candidates
will implement median voters preferences when elected
Does this happen in practice?
Empirical Evidence:
Lee, Moretti, and Butler 2004 : Evidence on Congressional voting sharply
contradicts prediction of median voter theory
Cannot rely on median voter logic to implement efficient choice even if mean and
median are close

5.7 ASSUMPTIONS OF THE MEDIAN VOTER MODEL

The median voter model is a powerful tool, but relies on a number of assumptions
worth mentioning:
Single-dimensional voting: Voters only care about one issue.(but in
practice the median voter in one issue could be different from the median
voter in another issue)
Only two candidates: With a 3rd candidate, there is no stable equilibrium.
No ideology or influence: Assumes politicians only care about votes, not
ideological positions.
No selective voting: All citizens actually vote.
No money as a tool of influence.
Perfect information along three dimensions: voter knowledge of the
issues, politician knowledge of the issues, and politician knowledge of
voter preferences.

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