WEEK 4 COLLECTIVE CHOICE THEORY/SECOND BEST THEORY Flashcards
Arrows Impossibility theorem/Borda Count/MajorityVoting/Pareto Efficecny/SinglePreferenceModel/
What is Arrows Impossibility Theorem
It is impossible to create a voting system that satisfies all desirable properties such as Pareto efficiency, transitivity, non-dictatorship, anyone rational can vote
Explain how majority voting can lead to cycling and what is the solution (the model called)?
Cycling occurs when people go from one extreme to the other, for example voting on a budget with A being the smallest and C being the most expensive, if vote for A then next would be B then C not A then straight to C etc. It essentially leads to unstable outcomes.
A solution is the single preference model in which options are uniformly distributed and people prefer options closer to their original. If B is closer to your original A than C your next choice is B.
Explain Majority Voting and explain whether or not it relies on the median
Majority voting is decided upon what gets the most votes.
Assume 5 people with various expenditure budget preferences
A - 500, B - 350, C - 200, D - 100, E - 50
If C prefers anything below 205 then 3 Yes and AB would say No, if C prefers below 198 then ABC would say NO and only 2 yes - C decides it all
Explain the borda count, explain how it violates the impossibity theorem, give example,
The borda count gives points to each rank so 1st place can give 3 points 2nd place 2 points 3rd place 1 point - and whatever gains most point wins. It violates the category that the changing of position or removal of a option should not affect other choices.
In borda count an individual can swap places 2 and 3 and it can change the entire outcome of the vote for everyone.
Explain how majority voting only cares about most votes and does not guarantee a greater utility
Well if most people vote for something that does not increase utility perhaps because of bribes, threats or stupidness then lower utility occured
How to minimise cost since there is no perfect voting mech, explain decision cost and budget allocation cost
Decision cost is self explanatory. Budget allocation is the cost to make sure all resources are efficiently allocated.
When one person makes a decision the budget allocation cost is high because it is unlikely the individual knows the wants of everyone but the decision cost is low as only he has to agree; when the population decides the decision cost is low as everyone knows what they want but the decision cost is high as everyone has to agree.
When drawing it the cost minimising point may be on the left or right of 50% therefore requiring absolute majority to go ahead (absolute majority is over 50% of people voting for one thing)
What is the first best world solution?
When the government can fix all market failures to achieve efficiency in the market
Should we always correct market inefficiency? Give example with pollution
To reduce pollution you may put a tax on it to reduce supply, reduce output and increase cost, however monopolies do this already so if you said okay lets break the monopoly apart then it would be more competition and overall more pollution, sometimes it is not advisable to correct all market inefficiency.
What is a second best world solution and where is it possible?
Second best solution is when the government can not correct all market failures and can only correct some.
This can happen due to imperfect information on preference and tech
Using two monopolies, private and nationalised, they are substitutes, government can intervene, explain how a first best world solution can be achieved.
Nationalised company would set price equal to marginal cost, government can give subsidy to private company to allow them to also price at marginal cost thus giving competition
Using two monopolies, private and nationalised, they are substitutes, government can intervene, explain how a second best world solution can be achieved as government can intervene freely.
Government controls the nationalised company, so reduce price o nationalised company below optimal price to really drive demand for it even if it is inefficient, this will force the private company to reduce prices too increasing competition and reducing inefficiency even though overall it is still inefficient just less so.
There is a road that is congested with traffic. There is talk about building a bridge with a toll. Unclear on the size of the bridge and toll price. Explain what would be the first best world solution. Then explain what would be the second best world solution. Use graphs when possible.
In a first best world, drivers operate where average cost equals marginal benefit as they only care about themselves. In first best world, we would set a toll at average cost equal to marginal cost so drivers operate at a socially optimal point, this reduces quantity of drivers on road.
This may be rejected, etc and a second best world may be forced.
In second best world the solution would be to build a bridge that is large and cheap but not so large that the subsidy required to build the bridge (through tax etc) is way too costly.
In terms of graph, the demand curve for the road should shift to the left, reducing congestion there. In terms of the market for cost/benefit(y) - capacity of bridge (x), the bigger and cheaper the bridge the greater the distance from the perfect LongRunMarginalCost as the subsidy is in the gap
