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CHAPTER
6
Political Economy
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Eve’s share (SE)
Direct Democracy-Unanimity
Rules
0’
DrE
Adam’s share (SA)
S*
DrA
0
r per year
r*
The Lindahl Model
6-2
Feasibility of Unanimity Rules
• Reaching equilibrium
• Practical problems
– Strategic behavior
– Time to reach equilibrium
6-3
Direct Democracy-Majority Voting
Rules
• Majority voting rule –
one more than half of
the voters must favor a
measure for it to be
approved
Voter
Choice
Brad
Jen
Angelina
First
A
C
B
Second
B
B
C
Third
C
A
A
6-4
Direct Democracy-Majority Voting
Rules
• Voting Paradox – community
preferences can be
inconsistent even though
individual’s preferences are
consistent
• Agenda Manipulation –
process of organizing order
of votes to ensure a favorable
outcome
• Cycling – when paired voting
on more than two
possibilities goes on
indefinitely without a
conclusion ever being
reached
Voter
Choice
Brad
Jen
Angelina
First
A
C
B
Second
B
A
C
Third
C
B
A
6-5
Graphing Preferences
Utility
Single-peaked preferences
Jen
Double-peaked preferences
Brad
Angelina
A
B
C
Missiles
6-6
Practical Importance of DoublePeaked Preferences
• Availability of private substitutes
• Issues ranked along single dimension
6-7
Direct Democracy - The Median
Voter Theorem
Voter
Expenditure
Donald
$5
Daisy
100
Huey
150
Dewey
160
Louie
700
6-8
Direct Democracy - Logrolling I
Voter
Project
Melanie
Rhett
Scarlet
Hospital
200
-50
-55
Total Net
Benefits
95
Library
-40
150
-30
80
Pool
-120
-60
400
220
6-9
Direct Democracy - Logrolling II
Voter
Project
Melanie
Rhett
Scarlet
Hospital
200
-110
-105
Total Net
Benefits
-15
Library
-40
150
-120
-10
Pool
-270
-140
400
-10
6-10
Direct Democracy - Arrow’s
Impossibility Theorem
• “Reasonable” collective
decision-making criteria
– It can produce a decision
whatever the configuration of
voters' preferences
– It must be able to rank all
possible outcomes
– It must be responsive to
individuals’ preferences
– It must be consistent
– Independence of irrelevant
alternatives
– Dictatorship ruled out
• Arrow’s Impossibility
Theorem
– All conceivable voting
schemes have some potential
for being unfair or producing
a paradoxical result
• Meaning of theorem
– consistent rule not necessarily
impossible to find, but cannot
be guaranteed
• Buchanan’s critique
• Use of social welfare
functions
6-11
Representative Democracy Elected Politicians
Number of Voters
Liberal
Conservative
6-12
Implications of the Median Voter
Model
• Two-party systems tend to be stable
• Replacement of direct referenda by
representative system has no effect on
outcomes
6-13
Other Factors Influencing Voting
•
•
•
•
•
Single-dimensional rankings
Ideology
Personality
Leadership
Decision to vote
6-14
Representative Democracy-Public
Employees
• Function of bureaucrats
• Goals of bureaucrats
6-15
Niskanen’s Model of Bureaucracy
C
$
V
Actual
output
Efficient
output
0
Q*
Qbc
Q per year
6-16
Representative Democracy –
Special Interests
• What are “Special Interests”?
• Establishment of Special Interest Groups
–
–
–
–
–
Source of Income: Capital or Labor
Size of Income
Source of Income: Industry of Employment
Region
Demographic and Personal Characteristics
6-17
Representative Democracy – RentSeeking
$
Rents
S=MC
D
tons of peanuts per year
MR
6-18
Representative Democracy – Other
Actors
• Judiciary
• Journalists
• Experts
6-19
Explaining Government Growth
• Citizen Preferences
G = f(P, I)
•
•
•
•
Marxist View
Chance Events
Changes in Social Attitudes
Income Redistribution
6-20
Controlling Government Growth
• Government growth as a non-issue
• Government growth as a problem
– Commitments made in the past
– Basic flaws in the political system
6-21
Improving the Workings of the Political
System
• Change bureaucratic incentives
– Financial incentives
– Privatization
• Change Fiscal Institutions
– Budget Enforcement Act (BEA) – 1990
– Balanced Budget rules at the state level
• Institute Constitutional Limitations
– Balanced Budget amendment
6-22
Provisions of a Typical Balanced Budget
Amendment
1. Congress must adopt a budget statement “in which
total outlays are no greater than total receipts”
2. Total receipts may not increase “by a rate greater
than the rate of increase in national income”
3. “The Congress and President shall…ensure that
actual outlays do not exceed the outlays set forth in
the budget statement”
4. The provisions can be overridden in times of war
6-23
Critique of Balanced Budget
Amendments
•
•
•
•
Forecasting issues
Definitional issues
Penalties for violation of the law
Economic issues
6-24