Lecture 6

Question 1

Why do governments do what they do?

Answer 1

Different ways of organizing government produce different results.
Ideal case: Government measures preferences & acts accordingly.

• Direct democracy: Voters directly vote in favor of or in opposition to particular public projects. => Projekte wählen
• Representative democracy: Voters elect representatives who decide on public projects => Representatives wählen

Question 2

What is Lindahl pricing?

Answer 2

=form of direct democracy
An approach to financing public goods in which individuals honestly reveal their willingness to pay and the government charges them that amount to finance the public good.
=> Ich würde 20€ für 1qm Park zahlen
* Getting individuals to reveal their true marginal WTP
* Aggregating these values to ensure that the social benefits > total cost
* Charging each individual according to his or her WTP

Problem: under- or overprovision of some public goods

Question 3

Lindahl´s procedure

Answer 3

Announce tax prices for the public good.
2. Everyone says how much of the public good they want at those tax prices.
3. Repeat to construct a marginal willingness to pay schedule for each individual.

Recall that efficient provision requires that total marginal WTP = MC.
4. Add up individual willingness to pay at each quantity of public good provided.
5. Find Q such that total marginal willingness to pay = MC.
6. Finance the public good by charging individuals their willingness’s to pay for that quantity.

requires unanimous consent to implement the public good
most governments only use majority voting (das was die absolute Mehrheit >50% wählt)

BSP:
MC= 1$
Jack: 25 for 2$ 75 for 0.75$
Anne: 25 for 0.75$, 75 for 0.25$
=> addiert: 25 for 2.75$, 75 for 1$
Solution: 75 fireworks for each 1$

Question 4

Why does Lindahl pricing work?

Answer 4

Under Lindahl pricing, the government produces the efficient amount of the public good.
* This is because MC = total marginal WTP.
* Each person’s price is equal to their own marginal willingness to pay, so this is an equilibrium.
* Lindahl pricing also exemplifies benefit taxation (=Taxation in which individuals are taxed for a public good according to their valuation of the benefit they receive from that good) => wem bring es wie viel?

Question 5

Problems of Lindahl pricing

Answer 5

why it is kept from being used in practice:
1. Preference revelation problem: Individuals have an incentive to lie about their willingness to pay, to lower their price. (=cheating/ free riding => 84 mil. decide => not my responsibility/ everyone thinks so)

2. Preference knowledge problem: Individuals may not know their willingness to pay. => even rational agents not know everything (zb wie viel ist mir eine extra Spur auf der Autobahn wert?)
3. Preference aggregation problem: It is not obvious how to aggregate individual preferences into a social welfare function => man kennt keine former (zb such wessen stimme wird mehr gezöhlt)

Question 6

Lindahl Pricing in the U.S.

Answer 6

Direct democracy remains strong in America + Switzerland

• Direct democracy uses referenda and voter initiatives.
• Referendum: A measure voted by the government allowing citizens to vote on state laws or constitutional amendments that have already been passed by the state legislature.
• Voter initiative: The placement of legislation on the ballot by citizens

Question 7

What goals must majority voting satisfy

Answer 7

1. Dominance
2. Transitivity (apples >oranges; bananas < oranges => apples >bananas) Präferenzen müssen klar bestimmbar sein/ rational decision making
3. Independence of irrelevant alternatives (vote over apples& bananas independent of oranges (other options should not matter)
   * Thus, majority voting can consistently aggregate individual preferences
   nur wenn: preferences are restricted to take a certain form.

Question 8

Beispiel Majority Voting where it works

Answer 8

preferences over School Spending (L, M, H)
1. Eltern, Alte, Junge Paare
eltern: h, m, l
Alte: l, m, h
Junge Paare: m, l, h
H vs L; H vs M; L vs M => m would win for any order of voting => majority voting is consistent

Question 9

Beispiel Majority Voting where it does not work

Answer 9

gleiches Szenariuo; nur private school parents anstatt Rentener
l, h, m
=> No clear winner and no consistent outcome from majority voting

Cycling: When majority voting does not deliver a consistent aggregation of individual preferences. => AGENDA DECIDES

Majority-runoff voting didn’t work, but maybe something else would.
* We could let everyone vote on their first choice.
* We could do weighted voting by assignment.
* In fact, there is no good way to consistently aggregate these preferences.

=> when double-peak optimum => AGENDA decides the outcome

Question 10

What is the arrow´s impossibility theorem?

Answer 10

there is no social decision (voting) rule that converts individual preferences into a consistent aggregate decision without either
(a) restricting preferences or
(b) imposing a dictatorship.

Question 11

Restricting Preferences to Solve the Impossibility Problem

Answer 11

One way to avoid the impossibility problem is to restrict preferences.
* The problem with the private school parents is that their preferences are not single peaked.
* Single-peaked preferences: Preferences with only a single local maximum, or peak, so that utility falls as choices move away in any direction from that peak.
=> otherwise impossible to have consistent choices

Question 12

What is the median Voter Theorem?

Answer 12

Majority voting will yield the outcome preferred by the median voter if preferences are single-peaked.

Median Voter: The voter whose tastes are in the middle of the set of voters.
The government need find only the one voter whose preferences for the public good are right in the middle of the distribution of social preferences and implement the level of public goods preferred by that voter.
MITTELMANN/ FRAU DER GESELLSCHAFT

Potentially inefficient:
51% prefer 10, 49% prefer - 20 => surplus falls by almost 5$
PROBLEM: Majority voting does not recognize INTENSITY of preferences

Question 13

Vote-Maximizing Politicians Represent the Median Voter

Answer 13

The median voter model may apply to representative democracies.
* Key assumption: All politicians care about is maximizing the number of votes they get.
* Politicians strategically position themselves to get the most votes.
* End up enacting the median voters’ preferences.

Question 14

Assumptions of Median Voter theorem

Answer 14

Single-dimensional voting
* The median voter model assumes that voters base their votes on a single issue.
(rather making a compromise)
* Representatives are elected on a bundle of issues.
* Different people may be at different points of the voting spectrum on different issues, so appealing to one end of the spectrum or another on some issues may be vote-maximizing.

Only two candidates
* The model assumes only two candidates.
* No equilibrium in the model with three or more candidates: there is always an incentive to move in response to your opponent’s positions.
* In many nations, the possibility of three or more valid candidates for office is a real one.

No ideology or influence
* The median voter theory assumes that politicians care only about maximizing votes.
* Ideological convictions could lead politicians to position themselves away from the center of the spectrum and the median voter.
FEHLER: politicians denken an Tochter => ändern Meinung über reproductive rights
POLITICIANS ARE PLAYERS WHO ONLY CARE ABOUT THE VOTES

• No selective voting = JEDER WÄHLT
• The median voter theory assumes that all people are affected by public goods vote.
• In fact, only a fraction of citizens vote in the United States.

No money
* The median voter theory ignores the role of money as a tool of influence in elections.
* If taking an extreme position on a given topic maximizes fund-raising, even if it does not directly maximize votes on that topic, it may serve the long-run interests of overall vote maximization by allowing the candidate to advertise more.
Europe: public financed elections; U.S. private money influencing election to a large degree

Full information
* The median voter model assumes perfect information along three dimensions:
* Voter knowledge of the issues
* Politician knowledge of the issues
* Politician knowledge of voter preferences (getting weaker now)
* All three of these assumptions are unrealistic.

Question 15

CONCLUSION MAJORITY VOTING

Answer 15

is not taking into account:
intensity
minorities

not consistent about: a) agenda; b) certain set-up how determined

DAHER: not always efficient outcome

Question 16

Lobbying and the Free Rider Problem

Answer 16

Lobbying (can come to inefficient products) suffers from the free rider problem
if many don´t have a strong opinion

• Many bills benefit a small number of people a great deal and harm a huge number of people by a small amount. (manchen bringt es viel; vielen schadet es)
• The smaller groups are much more able to organize and so can raise money to lobby more effectively.
  *KACKE: Thus, lobbying helps pass inefficient bills.

BETTER: all subsidies away from the market => 40ct cheaper; cool but not thinking about it (daher agricultural lobbying successful)

Question 17

What is Gerrymandering?

Answer 17

Waahlkreisschiebung = Manipulation von Wahlkreisgrenzen durch Parteien
The process of manipulating maps, on the part of a political party in power, in an effort to maintain or grow their power.
* The party in power often redraws congressional districts in an effort to increase the efficiency gap (= Party A’s wasted votes - Party B’s wasted votes/ all the votes cast in the election.
Durch:
* Cracking: Dividing the opposing party’s constituents into multiple districts so that they lose by a very narrow margin.
* Packing: Combining the opposing party’s constituents into a few districts so that they win by a large margin.

Question 18

What is the Public Choice Theory?

Answer 18

School of thought emphasizing that the government may not act to maximize the well-being of its citizens.

Government failure: The inability or unwillingness of the government to act primarily in the interest of its citizens.

Question 19

What is the Leviathan Theory?

Answer 19

Leviathan theory:
* Government attempts to grow as large as possible.
politicants& bureaucrats have own utility function (want to become more powerful => can be shown when they outspend the last government)
* Voters cannot trust the government to spend their tax dollars efficiently.
* Must design ways to combat government greed.

• This can explain the many rules in place in the United States and elsewhere that explicitly tie the government’s hands (Schuldenbremse: Haushalte von Bund und Ländern grundsätzlich ohne Einnahmen aus Krediten ausgleichen) in terms of taxes and spending.

ALSO:
limit gov. ability for investments/ providing right amount of public goods
without it it would spend more on health care instead of infrastructure

Question 20

Corruption = Buy certain outcome = Bribery
(Lobbying ist nur PR und legal)

Answer 20

= Not maximizing votes but own personal wealth
Def.: abuse of power by government officials in order to maximize their own personal wealth or that of their associates.
* May be constrained by electoral accountability, the ability of voters to throw out corrupt regimes. (z.B. müssen Parlamentarians sagen, wie viel sie insg. verdienen)

• Corruption also appears more ungezügelt in political systems that feature more red tape—bureaucratic barriers that make it costly to do business in a country.

Question 21

What are the implications of government failure?

Answer 21

Or can citizens use policies such as property tax limitations to limit harms imposed by government structure?
* Some evidence suggests that government failures can have long-lasting negative impacts on economic growth.

Top-down: European put bad institutions in colonies that were highly developed (z.B. in Brazil and Egypt)
Bottom-up: U.S., Australia => no one was really there yes

Question 22

Government failure and INSTITUTIONS

Answer 22

Look at historical causes of differences in government quality.
* Some European colonies were very dangerous, so rather than govern, Europeans set up “extractive”/ militarian institutions.
* These different institutions persist to the present, and countries with extractive institutions fare much worse.

comparing North and South Korea, which were arbitrarily divided after World War II.
* Prior to World War II, there were no inherent differences between the northern and southern regions of Korea.
* More than 60 years after the division, communist North Korea had per capita income of only $1,800, compared to South Korea’s $35,400.
* Since the major difference between North and South Korea is the form of government, this highlights the potential effects of government failures on economic growth.

Question 23

CONCLUSION

Answer 23

Markets have severe limitations& failures => can be intervened by government (however has also lim& failures)
daher: vote every 4 years + system getting more and more complex

The government is a collection of individuals who have the difficult task of aggregating the preferences of a large set of citizens.

• The core model of representative democracy suggests that governments are likely to pursue the policies preferred by the median voter. Evidence for this model is mixed.
• The extent to which government serves or fails to serve the interests of its citizens is a crucial topic for future research in political economy.