Unit 22

Question 1

Whats this unit about

Answer 1

How we can model what governments do from an economic perspective.

The coercive power of government, obligation to citizens based on civil and human rights.

Question 2

Define a government

Answer 2

only body in a geographical territory that can use force and threat of force on citizens of the nation.

Question 3

Possible objectives of the government

Answer 3

• ensure mutual gains possible through economic interactions are as large as possible and fully realised
• Sharing these gains in a fair manners

Question 4

Government policies examples

Answer 4

• competition policies to reduce price setting power of monopolies
• Environmental policies to reduce emissions of pollutants
• Subsidies for R&D

Question 5

Government tools:

Answer 5

• incentives
• Regulation
• Persuasion or information
• Public provision

Question 6

Government as a solution and problem

Answer 6

• to accomplish these valuable policies must have extraordinary powers - but this can also create a dilemma

Question 7

Constraining government power:

Answer 7

• democratic elections
• institutional checks and balances

Question 8

Market and government failure links

Answer 8

• market failure limited by the economic accountability due to demand curve of consumers
• Government failure limited by the political accountability of election defeat

Question 9

Government as a monopolist/ dictatorship political rent

Answer 9

Gap between t2/t1 and C is a political rent. Lower tax revenue will give them higher future duration of his time in office.

Question 10

What is an isorent curve

Answer 10

combinations of total tac revenue and future duration which give them same level of utility along the curve

• will choose highest isorent curve.
• Political rent = (T-C)xD

Question 11

Changes to the curve with political competition

Answer 11

Now there is a governing elite and elections.
- Makes duration curve a little bit shallower - for any given level of tax revenue, stay in power for less time than in a dictatorship.

Question 12

Income and substitution effect after political competition included onto diagram

Answer 12

• first shift the old curve parallel until it is tangential to the new isorent curve
• gap between durations and taxations are the income effect
• go from new income effect point to the actual outcome - to find substitution effect
• substitution effect here is positive as it moves us back to D*, the old duration rate.

Question 13

What if duration curve is very shallow

Answer 13

as seen above, when duration curve is shallower due to more competition, low enough tax can lead to proportionally larger increase in duration = higher political rent

Question 14

Democracy:

Answer 14

Political institutions of a country are rules of the game that determine who has power and how it is exercised
- who makes up the government
- The powers they can use when governing

Question 15

Median voter model

Answer 15

Spectrum from left to centre to right
- assumption is uniform distribution across the spectrum.
- If we can just get everyone to the left/right of the opposing party, will end up both in the middle as they try to outcompete each other slowly
- Middle is a Nash equilibrium outcome

Question 16

Weaknesses of median voter model

Answer 16

• not everyone votes
• winning votes not only reason party chooses a platform
• leaders of politics may care about other things than purely getting elected
• voters are not evenly distributed

Question 17

Ideal democracy:

Answer 17

• duration curve becomes shallower until horizontal, becomes equal tho C curve = in power forever in theory no political rents.

Question 18

Limited political competition model

Answer 18

Duration curve - steep
Accountability - none
Price/Tax - Tax>C
Political rents > 0
Comment - government as a monopolist

Question 19

Limited economic competition (monopoly)

Answer 19

Demand curve - steep
Accountability - limited exit
Price/Tax - P>MC
Economics profits > 0

Question 20

Ideal democracy

Answer 20

Duration curve - flat
Accountability - voice and exit
Price/Tax - T = C
Political rents = 0

Question 21

Perfect competition

Answer 21

Demand curve - flat
Accountability - exit
Price/Tax - P=MC
Economic profits = 0

Question 22

Fixing some problem of Pareto inefficiency or perceived unfairness will only happen if:

Answer 22

• economically feasible
• Administratively feasible
• Special interests allow it - if government policy must want to see the policy implemented.

Question 23

After an unemployment benefit rise financed by a tax on profits

Answer 23

at every level of employment workers demand a higher post tax real wage.
Real wage = nominal wage/price level
So firms will try increase prices to maintain real wage, price setting cuve falls = same wage as before but lower employment.
- therefore this model argues higher unemployment benefit is economically infeasible

Question 24

Special interests of the government

Answer 24

• government officials are agents and citizens are principals
• Why would the agent do what the principals desire?
• Who are the people?

Question 25

Firms vs democratic systems accountability methods

Answer 25

In firms:
- pay agent economic rent which they fear to lose if they do a bad job
- Monitor the work activity of employee
- Replace worker by another worker

In governments of democracy:
- give official a sufficient salary and prestige
- Monitor activities of the government
- Hold periodic elections

Question 26

Issue with periodic elections

Answer 26

This leads to short-termism only do short term projects with results visible before the next election

Question 27

Two parties will offer programmes which

Answer 27

Lie in the centre of the REMAINING spectrum, adjust their position but still offer similar programmes

Question 28

Economic infeasibility of policies refers to

Answer 28

Nash Equilibrium
- if not at NE, economically infeasible, policy will produce an outcome inconsistent with policy makers objectives as behavioural responses will produce UC.
- no requirement that the Pareto criterion is satisfied.

Question 29

What is difference between administrative and economic infeasibility?

Answer 29

Admin - cannot be implemented in practise, economic is policies that can be implemented but have undesirable consequences.

Question 30

What happens to some components of government spending when output falls

Answer 30

Due to automatic stabilisers, some components inevitably increase in spending when output falls.

Question 31

How would the model need to be modified to show a new situation where opposition party changes its leader and begins to look like a possible alternative government

Answer 31

The governing elite can increase its political rents if the greater political competition has the effect of making the country less prone to a violent overthrow of power

Question 32

Conditions which could cause the 2 parties to offer programmes that showed real differences

Answer 32

• voters are not equally distributed across the ideological spectrum from left to right
• few in the centre, rest in either extreme
• new party leaders care strong about the content of their programmes.