Democracy rests on an appealing idea: let the people decide.

Public choice theory applies economics to politics. Voters, politicians, civil servants and interest groups all respond to incentives, just like consumers and firms.

At the 2024 UK general election, turnout was just 59.7%, the lowest since 2001.

But even when everyone votes, does the majority always know what it wants?

A town has 90 voters and enough money for just one new public facility:

The voters fall into three equal groups, each ranking the options differently:

To begin with, everyone votes sincerely, for whichever option they genuinely prefer.

The council decides to settle the matter by majority voting.

Q1: What does the majority want?

The council holds a vote between A and B. Which wins?

It then holds a vote between B and C. Which wins?

Finally, it holds a vote between C and A. Which wins?

Does the town have a clear majority preference? What, if anything, has gone wrong?

Q2: Who controls the outcome?

Instead of holding three separate votes, the council uses a knockout system: two options are voted on first, and the winner faces the remaining option in a final vote.

Does it matter which two options are put to the vote first?

Suppose the mayor can choose the order of voting, but can’t change anyone’s preferences.

How much power does that give the mayor? Is controlling the agenda the same as controlling the votes?

Q3: Should voters always vote for what they really want?

Suppose the mayor puts A against B first, with the winner facing C in the final.

Imagine you belong to the group that prefers A, then B, then C, and you know how everyone else will vote.

Could your group get a better final outcome by voting against its genuine first preference in the opening round?

If voters start voting strategically, does majority voting become more or less representative of what people actually want?

Q4: Why bother voting at all?

Suppose the chance that your vote decides a national election is 1 in 10 million, and your preferred result is worth £1,000,000 to you. Voting costs you £10 in time and effort.

On these numbers, should you vote?

So why do millions of people vote, while millions of others stay at home? Is choosing not to vote necessarily irrational?

And if turnout differs systematically between groups, whose interests are politicians most likely to pay attention to?

Q5: Do politicians always want what’s best for society?

Suppose a government is considering a policy that would provide £10 million in benefits to a small, organised industry, but impose £20 million in costs spread across millions of taxpayers.

The industry campaigns hard for the policy. Most taxpayers barely notice it.

Why might a politician support the policy, even though its total costs exceed its benefits?

What incentives do politicians, firms, voters and civil servants face? Does democracy always encourage governments to choose policies that maximise social welfare?

Bonus: Can we design a better voting system?

Consider some alternatives: ranked-choice voting, proportional representation, referendums, citizens’ assemblies, or letting voters express how strongly they feel about different options.

Could changing the voting system solve the problems you’ve identified? Or is there something more fundamental about turning millions of individual preferences into a single collective decision?

Can any voting system be both completely fair and guaranteed to produce a consistent result?

P.S. Roll up your sleeves and explore the questions. Once you’ve grappled with them for a while, if you’re still stuck, there are graduated hints below, but challenge yourself first! (The answer comes in the next issue. Subscribe to get it straight to your inbox.)

How much does it cost to compete for power?

£94.5 million. That's how much political parties, candidates and other campaigners spent at the 2024 UK general election, a record according to the Electoral Commission.

Labour spent around £30.1 million, the Conservatives £23.9 million, and the Liberal Democrats and Reform UK around £5.6 million and £5.5 million respectively.

Why spend so much?

Campaigning can inform voters, encourage participation and help people make better choices. But it also raises an interesting economic question.

If one party spends more to win votes, its rivals have an incentive to spend more too. Each party may be acting rationally, yet the result could be an expensive competition in which everyone spends more without gaining much relative advantage.

Economists call this a positional arms race: what matters is not simply how much you spend, but how much you spend relative to your competitors.

That doesn't mean campaigning is wasteful. Information, debate and political participation have genuine value. But it does raise a question central to public choice theory:

Can individually rational competition for political power lead to collectively excessive spending?

Last time, six fans wanted three concert tickets priced at £80, and we asked: is ticket touting good for the economy?

If every ticket sells out at £80, the price is below the market-clearing level. At £80, more people want tickets than there are tickets: there’s excess demand, or a shortage.

In the six-fan example, count how many fans want a ticket at each price:

Any price above £150 and up to £200 exactly matches three fans to three tickets. Below £150, Dev also wants one; above £200, Chloe drops out.

That gap between the face value (£80) and the market-clearing price (£150–£200) is why touts exist. Whoever holds an £80 ticket can sell it for much more. Touting is a response to underpricing.

So why would an artist deliberately charge less than fans would pay?

If Dev, Ella and Finn can resell, we’d expect the tickets to reach Amira, Ben and Chloe. Each seller values their ticket at less than each buyer would pay, so there’s a price that makes both better off. With everyone free to trade, a resale price between £150 and £200 can support this allocation.

Value of the tickets to their holders:

Resale creates £560 in gains from trade, simply by moving the tickets to the people who value them more.

Who gains? Suppose the resale price is £175:

Total: £560. ✓ Every trade is voluntary, so everyone involved is better off. Nobody in the example loses, although the artist misses out on revenue it could have charged, and some people will feel the outcome is unfair (Q3).

Now suppose a professional tout bought all three tickets at £80.

The allocation is equally efficient, but the financial gains are distributed differently. In this example, the tout doesn’t improve the final allocation: it chiefly captures a profit that the original ticket holders could otherwise have earned.

Willingness to pay isn’t the same as how much someone values the experience. It depends on enjoyment and on income.

Amira’s £400 might be pocket money to her; Dev’s £150 might be everything he has. Dev may get far more enjoyment from the concert than Amira, but be able to pay less. This is the idea of diminishing marginal utility of money from #007: an extra £100 means much more to someone with little money than to someone with a lot.

So is price-based allocation efficient? In the economist’s narrow sense, allocative efficiency, yes: it maximises total willingness to pay. But that’s only “efficient” given the existing distribution of income. If we could measure enjoyment directly, giving the ticket to Dev might create more.

Is it fair? That depends on what you mean by fair:

Efficiency and fairness are different questions, and they can point in different directions.

But notice a twist. If Dev has the ticket and can resell it, he gets to choose: go to the concert, or take £175 he might value more. Banning resale takes that choice away from him.

In the six-fan example, nobody would voluntarily resell at £80. Dev values his ticket at £150, so he won’t sell it for £80; nor will Ella (£100) or Finn (£90). The tickets stay with Dev, Ella and Finn, worth £340, and the potential £560 gain from resale is lost.

This is a price ceiling, and it has the classic effects: when a maximum price is set below the market-clearing level, the shortage doesn’t go away. It just has to be resolved some other way.

Who benefits?

Who loses?

Unintended consequences:

So a ban changes who captures the gap between £80 and the market price. It doesn’t make the gap disappear.

Each system makes a different trade-off:

No system achieves everything. There’s a basic trade-off: with the number of tickets fixed, raising the price can eliminate excess demand. Keeping prices low means tickets must be rationed in some other way.

Many real systems combine approaches: a ballot for the first sale, tickets named to the buyer, and an official resale exchange at face value for people who can’t go. Which you prefer depends on how much weight you put on efficiency, fairness and accessibility.

Economists call a gain from capturing existing value, rather than creating new value, a “rent”. Spending resources primarily to capture such gains rather than create value is rent-seeking.

In Q2, the tout earns £285 in gross arbitrage profit by buying tickets at £80 and reselling them at £175.

But imagine several touts competing for that opportunity, investing in bots, software and staff simply to secure the tickets first.

This is where rent-seeking enters. Real resources are spent competing to capture an existing profit opportunity, rather than improving the concert or the allocation of tickets. In extreme cases, competition can absorb much of the potential profit.

Economists call this rent dissipation: the resources spent competing for a prize can approach the value of the prize itself.

But not all resale is wasteful. Arbitrage can help move goods to where they’re valued more. Intermediaries can create value by matching buyers and sellers, reducing search costs and making it easier to transfer unwanted tickets.

So where’s the line? Ask whether the activity creates value, or mainly helps someone capture an existing profit opportunity.

Resale can be: it moves tickets to the people who value them most, generating gains from trade.

Touting, in the sense of racing to grab tickets in bulk, may be socially wasteful: the tout captures a profit opportunity created by underpricing, while resources are spent competing to secure it.

The deeper issue isn’t simply the tout. It’s the gap between the face value and what fans would pay. Every system for allocating tickets must decide who receives the resulting benefits, and how many resources are used in the process.

Rockonomics (Alan B. Krueger, 2019): a leading economist explains the economics of the music industry, including why concert tickets are underpriced and why touts thrive. Very readable.

Marginal gains… Answer for today’s question is out in two days… Come back then or subscribe to get it direct to your inbox!

P.P.S.

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