The paradox is that majority voting does not always provide a clear and consistent picture of the public’s preferences. Here the courthouse is preferred to the school and the park is preferred to the courthouse, so we would surmise that the park is preferred to the school. But paired-choice voting would show that the school is preferred to the park.
17 3 (Key Question) Suppose that there are only five people in a society and that each favors one of the five highway construction options shown in Table 16.2 (include no highway construction as one of the options). Explain which of these highway options will be selected using a majority paired-choice vote. Will this option be the optimal size of the project from an economic perspective?
Project B (New 2-lane highway wins) using a paired-choice vote. There is no “paradox of voting” problem here and B is the preference of the median voter. The two voters favoring No new construction and Widening, respectively, will prefer New 2-lane highways—project B—to New 4- or 6-lane highways. The two voters preferring New 4- and 6-lane highways will prefer a New 2-lane highway to Widening or No new construction. The median voter’s preference for B will prevail. However, the optimal size of the project from an economic perspective is C—it would provide a greater net benefit to society than B.
17-4 (Key Question) How does the problem of limited and bundled choice in the public sector relate to economic efficiency? Why are public bureaucracies alleged to be less efficient than private enterprises?
The electorate is faced with a small number of candidates, each of whom offers a broad range or “bundle” of proposed policies. Voters are then forced to choose the individual candidate whose bundle of policies most resembles their own. The chances of a perfect identity between a particular candidate’s preferences and those of any voter are quite slim. As a result, the voter must purchase some unwanted public goods and services. This represents an inefficient allocation of resources.
Government bureaucracies do not function on the basis of profit, so the incentive for holding down costs is less than in the private sector. Also, because there is no profit-and-loss test of efficiency, it is difficult to determine whether public agencies are operating efficiently. Nor is there entry of competing entities to stimulate efficiency and develop improved public goods and services. Furthermore, wasteful expenditures can be maintained through the self-seeking lobbying of bureaucrats themselves, and the public budgetary process can reward rather than penalize inefficiency.
17 7 (Key Question) Suppose a tax is such that an individual with an income of $10,000 pays $2,000 of tax, a person with an income of $20,000 pays $3,000 of tax, a person with an income of $30,000 pays $4,000 of tax, and so forth. What is each person’s average tax rate? Is this tax regressive, proportional, or progressive?
Average tax rates: 20; 15; and 13.3 percent. Regressive.
17-9 (Key Question) What is the incidence of an excise tax when demand is highly inelastic? Elastic? What effect does the elasticity of supply have on the incidence of an excise tax? What is the efficiency loss of a tax, and how does it relate to elasticity of demand and supply?
The incidence of an excise tax is likely to be primarily on consumers when demand is highly inelastic and primarily on producers when demand is elastic. The more elastic the supply, the greater the incidence of an excise tax on consumers and the less on producers.
The efficiency loss of a sales or excise tax is the net benefit society sacrifices because consumption and production of the taxed product are reduced below the level of allocative efficiency which would occur without the tax. Other things equal, the greater the elasticities of demand and supply, the greater the efficiency loss of a particular tax.