2 Political EconomyThe field that applies economic principles to the analysis of political decision-making.How well do various decision-making procedures translate the preferences of their citizens into collective action?
3 Direct Democracy Unanimity Rules 0’Given efficient quantity level r* and demand curves, Adam pays 0-S* and Eve pays 0’-S*. Unanimity can result in efficient level if Lindahl price – tax share per individual – were allowedEve’s share (SE)S*box and labels1st click – Adam’s D2nd click – Eve’s D3rh click – equilibrium r and SAdam’s share (SA)r per yearr*The Lindahl Model
4 Feasibility of Unanimity Rules in Reaching Equilibrium Practical problemsStrategic behavior: do people vote sincerely or under report value to escape tax liability?Time to reach equilibrium given many citizens.
5 Direct Democracy Majority Voting Rules Majority voting rule – one more than half of the voters must favor a measure for it to be approvedHowever, majority voting does not always yield clear-cut resultsGiven the voter preferences to the right, “B” always wins against opponentsVoterChoiceBradJenAngelinaFirstACBSecondThird
6 Majority Voting Does Not Always Yield Clear-Cut Results: Double- vs Majority Voting Does Not Always Yield Clear-Cut Results: Double- vs. Single-Peaked PreferencesVoting Paradox – Community preferences can be inconsistent even though individual’s preferences are consistentGiven new preferences at the right:A vs. B → A winsB vs. C → B winsA vs. C → C winsAgenda Manipulation – Process of organizing order of votes to ensure a favorable outcomeCycling – when paired voting on more than two possibilities goes on indefinitely without a conclusion ever being reachedVoterChoiceBradJenAngelinaFirstACBSecondThird
7 Graphing Preferences Single-peaked preferences Utility JenDouble-peaked preferencesaxes and labels1st click – Brad2nd click – Jen3rd click – Angelina4th click – “Single-peaked preferences” and two arrows5th click – “Double-peaked preferences” and curved arrowBradAngelinaABCMissiles
8 Practical Importance of Double-Peaked Preferences: Examples Can occur with availability of private substitutes for a publicly provided goodExample: public park vs. private country clubCan occur with issues that can’t be ranked along single dimensionExample: abortion clinic vs.adult bookstore vs.Army recruitment office
9 Direct Democracy The Median Voter Theorem As long as preferences are single peaked, the outcome of majority voting reflects the median voter preferencesHuey’s preference of $150 spending would prevail in majority voting
10 Direct Democracy Logrolling I: Welfare Improved The trading of votes to obtain passage of a package of legislative proposalsIf projects voted on 1 at a time, all loseHospital → only MelanieLibrary → only RhettPool → only ScarletSolution is for Melanie to vote for library if Rhett votes for hospital, etc
11 Direct Democracy Logrolling II: Welfare Lowered Welfare lowered if vote trading leads to projects with negative net benefits being passed
12 Direct Democracy Arrow’s Impossibility Theorem “Reasonable” collective decision-making should be logical and respect individuals’ preferencesCriteriaIt can produce a decision whatever the configuration of voters' preferencesIt must be able to rank all possible outcomesIt must be responsive to individuals’ preferencesIt must be consistentIndependence of irrelevant alternativesDictatorship ruled outLeft box by 2nd level paragraphsRight box by 2nd level paragraphs
13 Direct Democracy Arrow’s Impossibility Theorem Unfortunately, all conceivable voting schemes have some potential for being unfair or producing a paradoxical resultMeaning of theorem is that a fair, consistent rule is not necessarily impossible to find, but it is not guaranteed a society will find oneBuchanan’s critique: Despite being inconsistent, majority rule has other benefitsArrow’s theorem implies social welfare functions are useless, but most economists believe they provide valuable insights
14 Representative Democracy Elected Politicians Distribution and labels1st click - Female politician locates on right2nd click - Male politician locates directly to left of female3rd click - female moves to left of male (but still to right of mean)4th click - male politician moves just left of mean
15 Implications of the Median Voter Model The candidate who adopts the median position (M) will defeat the candidate who adopts the position away from the median (S)Two-party systems tend to be stable because they stake out positions near centerReplacement of direct referenda by representative system has no effect on outcomes
16 Other Factors Influencing Voting Non-single-dimensional rankings cause median voter theorem to fall apartIdeologyPersonalityLeadershipDecision to vote
17 Representative Democracy Public Employees Function of bureaucratsImplement policyProvide technical expertise in the design and execution of programs and policiesProvide “institutional memory”Provide accurate documentation to ensureEqual treatment for eligible citizensPrevent corruptionGoals of bureaucratsFulfill wishes of electorate and representativesPerhaps increasing power and their own perks
18 Representative Democracy Special Interests Establishment of Special Interest GroupsSource of Income: Capital or LaborSize of IncomeSource of Income: Industry of EmploymentRegionDemographic and Personal Characteristics
19 Representative Democracy Special Interests and Rent-Seeking Rent: Higher than normal returns.Rent-seeking: Using government to obtain rents$RentsAxes, labels, D, MR, and S=MC1st click - rentsS=MCDtons of peanuts per yearMR
20 Representative Democracy Other Actors JudiciaryJournalistsExperts
21 Explaining Government Growth Ratio of government expenditures to Gross Domestic ProductSources: Pommerehne (1977); OECD (2012a)
22 Explaining Government Growth Citizen Preferences: G = f(P, I)G=Median voter’s demand of public sector goods & servicesP=Price of public sector goods and servicesI=IncomeMarxist ViewThe public sector must expand to absorb private excess production.Chance EventsWars, recessionsChanges in Social AttitudesIncome Redistribution
23 Chapter 6 SummaryPolitical Economy applies economic principles to analysis of political decision-makingMajority voting in a direct democracy as a method for choosing levels of public goods includes consideration of single- vs. double-peaked preferences, logrolling, and Lindahl pricingArrow’s Impossibility Theorem: a fair, consistent rule is not necessarily impossible to find, but is not guaranteedUnderstanding government behavior requires analysis of public employees, special interest groups and rent-seekingThe growth of government in various countries can be explained by citizen choice, random events, government’s need to absorb excess private production, ignorance of the opportunity costs of public programs, and efforts to use government to redistribute income
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