The paper is meant to be an extension of the theories of choice, empirical analysis and theories concerning communication between macro-economic sub-systems and even between (sub) systems. A new perception will be given to all these theories and a different meaning of the factors influencing finance decisions will be shown. Another factor is introduced taking into account one’s choice, which restructures somehow the perception of the function of individuals’ choice. I named it factor ? (alpha) which is a spirituality factor provoking exchanges of information between economic sub-systems. This leads to a rearrangement of the economic and social patterns of behavior and of choice directly influencing the finance decisions and re-equilibrating the inter-conditioning sub-systems of the world.

Teodora ALECU

English

Research Papers in Economics

Page 9  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
Individual vs Collective Choice  
in Corporate Finance 
 
 
Teodora ALECU, PhD 
International Tax Advisor, Bucharest, Romania 
E-mail: twa2twa[at]yahoo[dot]com 
 
 
Abstract:  The  paper  is  meant  to  be  an  extension  of  the  theories  of 
choice,  empirical  analysis  and  theories  concerning 
communication  between  macro-economic  sub-systems  and 
even between (sub) systems. A new perception will be given 
to all these theories and a different meaning of the factors 
influencing finance decisions will be shown. Another factor is 
introduced  taking  into  account  one’s  choice,  which 
restructures  somehow  the  perception  of  the  function  of 
individuals’  choice.  I  named  it  factor  α  (alpha)  which  is  a 
spirituality  factor  provoking  exchanges  of  information 
between  economic  sub-systems.  This  leads  to  a 
rearrangement  of  the  economic  and  social  patterns  of 
behavior  and  of  choice  directly  influencing  the  finance 
decisions  and  re-equilibrating  the  inter-conditioning  sub-
systems of the world. 
Keywords: Theory  of  choice,  utility,  median  voter,  empirical  analysis, 
corporate and public finance, spirituality factor, private and 
public  consumption,  budget  allocation,  public  and  private 
goods. 
 
 
 Page 10  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
  The  individual  consumer  represents  the  key  factor  in  the 
movement, development or stagnation of any individual or public finance 
operation.  Back  to  any  decision  of  legal  persons  stays  the  decision  of 
individuals  based  on  their  ultimate  balance  between  their  subjective 
opinion and the rationing they made.    
  Harold Hotelling introduced a theorem focusing on the individuals’ 
reaction for consumption and the feedback in action of private and public 
bodies.  According to Hotelling, “competitors differentiate their goods and 
services  as  little  as  possible  in  order  to  maximize  demand  from  the 
public”.  The  marginal  cost  pricing  is  important,  as  the  cost  of  any 
additional extra unit of manufactured good or service rendered is to be 
seen through the eyes of the individual’s preferences.  
  Anthony  Downs  enlarged  the  vision  and  made  a  picture  of  the 
macroeconomic  reality  having  as  constraint  the  individuals’  subjective 
preference. Public bodies, public institutions, not only private companies, 
have to carry the activity under the circumstances of scared resources 
and individual preference for certain goods and services, which cannot be 
always  explained.  According  to  Anthony  Downs,  the  authorities  put  in 
place  “specific  regulatory  policies  aimed  at  influencing  how  growth 
occurs, mainly within a locality” and private companies look for “smart 
growth”,  which  include  “limiting  outward  (apparent)  expansion, 
encouraging  higher  density  development,  revitalizing  older  areas, 
preserving open space”.     
  Authorities  and  public  institutions  want  sustainable  growth  and 
regional  development;  companies  want  to  obtain  smart  growths 
materialized in higher profits and expansion of the business capacities. 
Taking out a macroeconomic system from inertia can be made by large 
public subsidies, that “invisible hand” of the state can speed the engine 
of the region.   
  Public  subsidies  mean  public  investments,  goods  and  services Page 11  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
supplied  to the people and  financed  by the government, via the  State 
Budget system.  
    Let’s assume that qj represent private goods and qk represent 
public goods, while pj is the price of am unit of private good and ck is the 
cost of an unity of collective good. Ri  
represents the revenue of the individual expressing or which is able to 
express the consumption decision.  
  The demand for both private and public goods can be summarized 
in a function, as below: 
(1) qj = qj(pj, ck, Ri), having j = 1, 2, … J - the individuals demand for 
private goods 
(2) qk = qk(pj, ck, Ri), having k = 1, 2, … K – the individuals demand for 
public goods. 
 
Financing public goods and services is guaranteed under the budget 
allocation system, as decided by the government.  Public subsidies are 
allocated to public goods and services. Communities are benefiting from 
these  engines  of  development.  On  the  other  hand,  communities  are 
contributing to the budgets to be allocated, by paying all kind of taxes.  
William S. Comanor introduces the Median Voter Rule and the Theory 
of Political Choice. Decisions of public institutions and politicians is taken 
in a way so that to maximize the satisfaction of the people and thus the 
number  of  votes.  However,  in  practice,  the  median  preference  is  not 
always  observed.  According  to  the  Median  Voter  Model  (Roger  D. 
Congleton),  the  old  economic  models  based  on  the  majority  decision 
making  are  replaced  with  monitoring  the  preference  of  the  median 
individual  behavior.  Observing  the  behavior  of  the  median  decision 
making is one of the simplest ways to monitor  the “possible model of Page 12  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
majoritarian decision making”.  
The economic function of the overall individual’s preference is utility. 
The  individual’s  response  depends  on  its  personal  utility  of  benefiting 
from the rights to use of certain goods and services.  
 
 
where  
, with    the financing tax born by the individual i and i = 1, 
2, ..., N. 
 
 
 
Each  individual  has  a  personal  decision  system.  Preferences  are 
characteristics  of  each  individual.  Each  community,  at  its  turn,  shows 
different preferences. Each individual will decide for that good or service 
which  minimize  its  losses  determined  by  the  quantities  of  goods  and 
volumes of services he needs and the quantities and volumes he actually 
gets. The individual has a “strategic behavior” which will allow that the 
individual  obtain  the  best  solution  under  the  circumstances  of  the 
constraints given.   
Overall utility from the individual’s perspective is the best measure of 
its  satisfaction  which  will  push  the  person  to  take  a  certain  action:  to 
want  and  take  steps  to  obtain  certain  private  and  public  goods  and 
) , ( max
,
k j
i
q q
q q U
k j
 
 
 
K
k
i k k
J
j
j j R q p q p
1 1
k k c p   N
1
 
) , , , ( N R c p q q i k j j j 
) , , , ( N R c p q q i k j k k Page 13  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
services. The maximized utility leads to an acquisition decision and/or to 
a decision to use free of charge certain goods.  
Individual utilities lead to a collective utility of the community. If we 
monitor  all  the  utility  functions,  characteristic  for  each  individual,  the 
median individual called M will has its maximized utility of the preference 
accomplished as follows:  
 
 
 
The demand functions show as follows: 
 
 
 
 
The elasticity of the individuals demand becomes:  
 
 
 
Assuming that   
) , ( max
,
k j
M
q q
q q U
k j
 
 
 
K
k
M k M k
M
k
J
j
j j R q R c p q p
1 1
) , (
) ), , ( , ( M M k k j
M M
j R R c p p q q
j 
) ), , ( , ( M M k k j
M
k
M
k R R c p p q q 
 


 


  


 


  


 


  


 


M
M
k
M
k
M
k
M
M
k
M
M
k
R
p
E
p
q
E
R
q
E
R
q
E
0   


 


  


 


M
M
k
M
k
M
k
R
p
E
p
q
EPage 14  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
Therefore, if   and   then the elasticity 
of the total income which can be allocated to consumption will be positive 
and K public good is qualifies as a superior good.  
 
If  then the K good will qualify as an inferior good.  
 
The function of the collective demand for public goods is driven by the 
demand function of the median individual M.  
 
 
where   is the quantity of public good needed and asked for by the 
median individual,  
is the price, or the cost of the public good, and   is the income of 
the median individual (if he pays for the good) or the income available to 
be spent by the authorities for offering the public good to the median 
individual.  
 
 
where  is the quantity of goods the median individual wishes to buy, 
0   


 


M
M
k
R
q
E  


 


  


 


  


 


M
M
k
M
k
M
k
M
M
k
R
p
E
p
q
E
R
q
E
 


 


  


 


  


 


M
M
k
M
k
M
k
M
M
k
R
p
E
p
q
E
R
q
E
)) , ( , ( M k
M
j
M
k
M
k R c p p q q
k 
M
k q
M
k p M R
 N
q
q
k M
k
*

M
k qPage 15  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
is the total quantity of goods available to people, N is the total 
number of individual forming the collectivity. λ is a parameter which 
describes the consumption of public goods and public services K.  
The quantities of public goods and services available to be put at 
disposal to a community are described by the following function:  
 
And  , where Gk represents the total expenses 
from state budget for financing the public goods and services for the 
community.  
  The above mentioned theories and functions seem very simple and 
for this reason they have been subject to criticism. Simple things are 
however the best in many cases, as people need solution and clear 
arguments to base their decisions on. 
  What  I  want  to  draw  the  attention  to,  is  that  economic  models 
must  be  reoriented  and  a  new  vision  stays  at  the  gate  of  the  new 
centuries.  Any  use  of  goods  and  services  has  as  base  the  individual 
choice.  As  outlined  above,  collectivities  consist  of  individuals  and 
individuals decisions represent the base for any political and economical 
action.  
  Individuals must be seen in their complexity. The utility a good or 
services has from the perspective of an individual also depends on an α 
subjective  factor.  The  education,  spirituality  and  intuition  lead  the 
individual to a decision. To maximize the utility of an individual means to 
maximize the individual’s sense of accomplishment of its wishes, destiny 
so that he can live in complete happiness and harmony. Peaceful minds 
and  joyful  harts,  as  well  as  a  healthy  body  are  desiderates  of  an 
*
k q
) , , ), , , , ( , (
* *   N R N R c p p q q
M M
k
M
j k k j 
k k i k
N
i
i
k G q N R p p  

) , , (
1Page 16  Oeconomics of Knowledge, Volume 1, Issue 2, 4Q 2009 
 
individual. The means by which such desiderates are achieved are not the 
same  for  each  individual,  not  even  when  we  are  talking  about  basic 
needs as food. Some individuals go to fast-foods, others are vegetarians. 
Some individuals need to feel security in their lives, but many have an 
equilibrium in their mind and feel no insecurity, so there is no need for so 
many additional government expenditures in this area.  
  Humans’ sense is towards a perfect equilibrium and harmony, with 
a  touch  of  joy  and  satisfaction  of  their  lives.  The  decisions  of  the 
individuals  are  guided  by  a  subjective  factor  α  which  without  many 
explanations  makes  the  person  feel  that  he  is  on  the  right  path. 
Communities’ decisions should be guided by the sense of enlargement of 
the personal satisfaction.  
crucially depends on the personal invisible sense α  which 
comes from the inner of the individuals and makes them be in harmony 
with their invisible purpose of life.  
) , ( max
,
k j
M
q q
q q U
k j
References 
BRAN P.  Economics of value, Academy of Economic Studies 
Publishing House, Bucharest, 2002 
Mosteanu T.  Budgetary policies and techniques, University Pub-
lishing, Bucharest, 2004  
Congleton R.  The Median Voter Model, Encyclopedia of Public 
Choice, 2002 
Comanor W.  The Median Voter Rule and the Theory of Political 
Choice, University of California, 2002 
   

Economics of value, Academy of Economic Studies Publishing House,

Individual vs Collective Choice in Corporate Finance

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