L17: Political Economy Flashcards
public choice mechanism
process for translating individual preferences into social choices
necessary because there is no market
samuelson condition for socially efficient public goods spending
sum of the valuations of the public good = good’s marginal cost
- how much everyone values that public good together
lindahl pricing
charging individuals based on strength of preferences for public good since people have heterogeneous preferences
setting individual fees per unit of the public good equal to their valuation at the efficient level
hard to use in practice since individuals have an incentive to live about WTP to lower price
benefit taxation
taxation where individuals are taxed for a public good according to their valuation of the benefit they receive from that good
works for specific public goods when there’s a targeted group that benefits (i.e. neighbourhood districts)
majority voting
mechanism used to aggregate individual votes into a social decision
consistently aggregates individual preferences only if preferences are restricted to take a certain form
cycling
when majority voting does not deliver a consistent aggregation of individual preferences
arrow’s impossibility theorem
no such mechanism exists where individual preferences can be aggregated into a social preference with
no restriction on preferences
no dictator
pareto dominance
- everyone prefers one outcome to another
transitivity
- if a is preferred to b and b is preferred to c, then a has to be preferred to c
independence of irrelevant alternatives
- new option c shouldn’t affect the choice between a and b
solving the impossibility problem: restricting preferences
single-peaked preferences where majority voting wouldn’t have a problem
median voter theorem
majority voting yields outcome preferred by median voter if preferences are single-peaked
median voter and efficiency
median marginal benefit being 0 doesn’t imply that the average marginal benefit is 0
assumptions of the median voter model
single-dimensional voting
- voters basing votes on single issue
- representatives elected on a bundle of issues
only two candidates
no ideology/influence
- assumption that politicians care only about maximising votes
no selective voting
- all people vote
no money
- money as a tool of influence in elections is ignored
full information
- perfect information in terms of voter and politician knowledge of issues and politician knowledge of voter preferences
government failure
inability or unwillingness of the government to act primarily in the interest of its citizens
explanations of government failure
bureaucracies
- civil servants follow self-interest to maximise their own revenue or influence
leviathan theory
- government attempts to grow as large as possible (greed)
corruption
- abuse of power by government officials to maximise their own personal wealth
