Chap06 Political Economy.ppt

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1、1Chapter 6 Political EconomyPublic Economics2Political Economy Defined Political Economy is the application of economic principles to the analysis of political decision making. Self-interest in the marketplace, this often leads to efficiency; different implications in “political market.” Maximizatio

2、n one goal may be to maximize social welfare.3Direct Democracy Several kinds of voting procedures: Unanimity rules Majority voting rules Logrolling Problems with all of these rules: Arrows Impossibility Theorem4Direct Democracy:Unanimity rules Unanimity rules: All parties must agree for a policy to

3、be implemented. Example: In principle, society could agree that a public good should be provided rather than not being provided. Lindahl prices designed to elicit unanimous agreement for provision of public good.5Direct Democracy:Example of Lindahls procedure 2 individuals, Adam & Eve Fireworks disp

4、lay (public good, denote as r) SA =Adams share of total cost of fireworks provision For any given share, SA, Adam demands some quantity of fireworks.Figure 6.17Direct Democracy:Example of Lindahls procedureFigure 6.1 shows the relationship between each persons tax share & quantity of fireworks deman

5、ded.Each person demands more fireworks as the share of costs paid falls.Shares add up to one: SA+SE=1Lindahl prices: Each person faces a “personalized price” per unit of the public good, which depends on the tax share.8Direct Democracy:Example of Lindahls procedure Equilibrium: set of Lindahl prices

6、 such that each person votes for the same quantity of the public good. In Figure 6.1, this occurs at quantity r*, and each persons share is measured on the x-axis.9Direct Democracy:Feasibility of Lindahls procedure Could imagine an auctioneer announces initial set of tax schedules, then Adam & Eve v

7、ote on quantity of fireworks. If they agree on quantity, stop. Otherwise, continue process with new tax shares. Would converge to r*, which is Pareto efficient.10Direct Democracy:Feasibility of Lindahls procedure Problems: Assumes people vote sincerely Strategic behavior (e.g., misrepresenting ones

8、preferences) may prevent Lindahl equilibrium Finding tax shares may take a lot of time. Imagine many parties, not just two.11Direct Democracy:Majority Voting rules Majority Voting rules: one more than half of the votes must favor a measure to gain approval. Although the rules are familiar, potential

9、 problems with them.12Direct Democracy:Majority Voting rule example 3 people have to choose among 3 levels of missile provision A is small amount of provision B is moderate amount of provision C is large amount of provision People are Cosmo, Elaine, and George Preferences are shown in Table 6.1Table

10、 6.114Direct Democracy:Majority Voting rule example In Table 6.1, the quantity B would win in an election of B vs. A (by a vote of 2-1, with Elaine and George voting for B). B would also win in an election of B vs. C (by a vote of 2-1, with Cosmo and George voting for B). Selection of B in this case

11、 is independent of the order in which the votes are taken.15Direct Democracy:Majority Voting rule example Now consider the preferences are shown in Table 6.2Table 6.217Direct Democracy:Majority Voting rule example In Table 6.2, imagine a series of paired elections to determine the most preferred lev

12、el. Elaines preferences are the only ones that have changed. The quantity A would win in an election of A vs. B (by a vote of 2-1, with Cosmo and Elaine voting for A). The quantity B would win in an election of B vs. C (by a vote of 2-1, with Cosmo and George voting for B). The quantity C would win

13、in an election of A vs. C (by a vote of 2-1, with Elaine and George voting for B).18Direct Democracy:Majority Voting rule example Thus, the ultimate outcome depends crucially on the order in which the votes are taken. It is clear in this example that whichever quantity was not considered in the firs

14、t round would ultimately win. Agenda manipulation is the process of organizing the order of votes to assure a favorable outcome.19Direct Democracy:Majority Voting rule example Another problem is cycling: paired voting can go on forever without reaching a decision.20Direct Democracy:Why difficulties

15、with Majority Voting rule? A peak in an individuals preferences are a point at which all neighboring points are lower. Single peaked preferences: utility falls as person moves away from most preferred outcome in any & all directions. Double peaked preferences: utility initially falls as person moves

16、 away from most preferred outcome, but then rises.21Direct Democracy:Why difficulties with Majority Voting rule? In Figure 6.2, Elaine has double-peaked preferences as quantity increases. This means she prefers either very large or very small missile expenditures to a quantity in the middle.Figure 6

17、.223Direct Democracy:Why difficulties with Majority Voting rule? How plausible are double-peaked preferences? It depends on the context. Missiles: not very plausible Public park: more plausible, good for which there are private substitutes. Goods which cannot be ordered on a single dimension like “s

18、ize.” The use of a vacant building, for example.24Direct Democracy:Majority Voting rules Return to case when alternatives can be ranked on a characteristic, like size or quantity. The median voter is the voter whose preferences lie in the middle of the set of all voters preferences. Half of voters w

19、ant more of the good, and half want less.25Direct Democracy:Median voter theorem The median voter theorem states that as long as all preferences are single-peaked, the outcome of majority voting reflects the preferences of the median voter.26Direct Democracy:Median voter theorem illustrated Consider

20、 the 5 voters in Table 6.3, each with single-peaked preferences. Each voters individually preferred expenditure is given in the table.Table 6.328Direct Democracy:Median voter theorem illustratedA movement from $0 to $5 would be by all five voters.A movement from $0 to $100 would be approved by Daisy

21、, Huey, Dewey, and Louie.A movement from $100 to $150 would be approved by Huey, Dewey, and Louie.Any increase above $150 would be blocked by a majority of voters. Hence the majority votes for $150, which is the preferred amount of the median voter, Huey.29Direct Democracy:Logrolling Logrolling syst

22、ems allow people to trade votes, and hence register how strongly they feel about various issues. Vote trading is controversial, but may lead to more efficient provision of public goods.30Direct Democracy:Logrolling Example Consider the benefits from 3 different projects for 3 people. Negative values

23、 mean a net loss.Table 6.432Direct Democracy:Logrolling Example Table 6.4 shows the net benefit for each project is positive, but under a simple majority rule scheme, none get approved. Net benefit is negative for two of the voters in each case (but small), and positive for one. By trading votes, po

24、ssible to get all 3 approved, and society gains welfare.33Direct Democracy:Logrolling Example Logrolling could lead to inefficient outcomes, however. Vary the benefits for all 3 projects, so that the net benefit of each is now negative in Table 6.5. Here vote trading can lead to inefficient passage.

25、Table 6.535Direct Democracy:Logrolling Example In the second example, a majority of votes form a coalition to vote for projects that serve their interests, but whose costs are borne mainly by the minority of voters.36Direct Democracy: Problems Can any ethically acceptable method for translating indi

26、vidual preferences into collective preferences be free of difficulties discussed so far?37Direct Democracy: Problems Criteria for decision making rule 1. Rule can produce a decision whatever the configuration of voters preferences (e.g., double-peaked, etc.) 2. Rule can rank all possible outcomes 3.

27、 Rule must be responsive to individual preferences.38Direct Democracy: Problems Criteria for decision making rule 4. Rule must be consistent (e.g., transitivity) 5. Rule must be able to rank two policies independent of irrelevant alternatives. 6. No dictatorship. Social preferences must not reflect

28、preferences of only one individual.39Direct Democracy: Problems Arrows Impossibility Theorem states that it is impossible to find a decision rule that satisfies all of these criteria. These 6 criteria, taken together, seem reasonable. But theorem casts doubt on the ability of democracies to function

29、.40Direct Democracy: Problems If any one of the 6 criteria are dropped, it is possible to find a collective decision making rule. It is sometimes possible, but not guaranteed, to find a decision making rule. E.g., if everyone has same preferences. Theorem casts doubt on the use of social welfare fun

30、ctions.41Representative Democracy In reality, government doesnt simply aggregate peoples preferences; rather the governing is done by politicians, judges, bureaucrats, and so on. These players have their own objective functions.42Representative Democracy:Politicians Elected Politicians: If voters ha

31、ve single peaked preferences, the vote-maximizing politician adopts the preferred program of the median voter. See Figure 6.3. Candidates move to middle of spectrum, because voters support candidate with view closest to own, and only one wins.Figure 6.344Representative Democracy:Politicians Implicat

32、ions: 2 party systems tend to be “stable” in the sense that both stake out positions near the “center.” Replacement of direct referenda (e.g., direct democracy) by a representative system has no effect on outcome. Both mirror the preferences of median voter.45Representative Democracy:Politicians Rea

33、l-life complications Ideology matters: politicians care about more than just winning elections. Personality: voters care about more than just issues. Leadership: politicians do not simply respond to voters preferences. Voter participation: may be affected by relative difference in candidates46Repres

34、entative Democracy:Public employees/bureaucrats Bureaucrats: government employees. Nave to assume that a bureaucrats only aim is to interpret and passively fulfill the wishes of the electorate and its representatives. Niskanen (1971) argues that bureaucrats tend to focus on maximizing perquisites of

35、 public office, public reputation, power, etc., because opportunities for monetary gains are minimal.Figure 6.448Representative Democracy:Public employees/bureaucrats In previous figure, bureaucrat doesnt choose the efficient amount for the project, Q*, where MB=MC, but rather chooses a larger proje

36、ct, Qbc, where TB=TC. Project doesnt suffer losses, but is inefficient.49Representative Democracy:Public employees/bureaucrats Bureaucrats have incentive to promote activities that increase the sponsors perceptions of the projects benefits. Analogous to shifting the V curve upward. Bureaucrats have

37、informational advantage, to present the alternatives as “take Qbc or none at all.”50Representative Democracy:Special Interests Special interest groups can form coalitions and exercise a disproportionate amount of power if they vote in blocks or make campaign contributions. Groups form based on many

38、factors, including capital vs. labor, rich vs. poor, industries, regions, and demographics.51Representative Democracy:Special Interests Rent-seeking is using the government to obtain higher than normal returns (“rents”). One example, illustrated in Figure 6.5, is the peanut industry lobbying the gov

39、ernment to impose peanut quotas. This enforces a cartel-like arrangement.Figure 6.553Representative Democracy:Special Interests In Figure 6.5, the competitive output would be at Qc. The peanut industry could try to form an illegal cartel to restrict output to Qcartel, but each firm has an individual

40、 incentive to cheat. If producers can lobby for quotas, they can enforce this output level.54Representative Democracy:Special Interests Standard deadweight loss from reduced output is equal to triangle cde. To the extent that the economic rents, abcd, are spent on socially wasteful lobbying (rather

41、than being a transfer to producers), this is also considered deadweight loss.55Explaining Government Growth Various reasons to explain growth in government expenditure Citizen preferences Marxist view Chance events Changes in social attitudes Income redistribution56Controlling Government Growth Private sector competition Reforming budget process Constitutional amendments57Recap of Political Economy Political Economy definition Direct Democracy Representative Democracy Government Growth