Chapter 6-Political Economy Public economics
1 Chapter 6 – Political Economy Public Economics
Political Economy Defined Political Economy is the application of economic principles to the analysis of political decision making Self-interest -in the marketplace, this often leads to efficiency; different implications in" political market Maximization -one goal may be to maximize social welfare
2 Political Economy Defined • Political Economy is the application of economic principles to the analysis of political decision making. – Self-interest – in the marketplace, this often leads to efficiency; different implications in “political market.” – Maximization – one goal may be to maximize social welfare
Direct Democracy Several kinds of voting procedures Unanimity rules Majority voting rules Logrolling · Problems with a‖ of these rules: Arrows Impossibility Theorem
3 Direct Democracy • Several kinds of voting procedures: – Unanimity rules – Majority voting rules – Logrolling • Problems with all of these rules: Arrow’s Impossibility Theorem
Direct Democracy Unanimity rules Unanimity rules: All parties must agree for a policy to be implemented EXample: In principle, society could agree that a public good should be provided rather than not being provided Lindahl prices designed to elicit unanimous agreement for provision of public good
4 Direct Democracy: Unanimity rules • Unanimity rules: All parties must agree for a policy to be implemented. – Example: In principle, society could agree that a public good should be provided rather than not being provided. • Lindahl prices designed to elicit unanimous agreement for provision of public good
Direct Democracy EXample of Lindahl's procedure 2 individuals, Adam Eve Fireworks display(public good, denote as n) SA=Adam's share of total cost of fireworks provIsion For any given share, SA, Adam demands some quantity of fireworks
5 Direct Democracy: Example of Lindahl’s procedure • 2 individuals, Adam & Eve • Fireworks display (public good, denote as r) • SA =Adam’s share of total cost of fireworks provision • For any given share, SA, Adam demands some quantity of fireworks
Figure 6.1 r per year
Figure 6.1
Direct Democracy EXample of Lindahl's procedure Figure 6. 1 shows the relationship between each persons tax share quantity of fireworks demanded Each person demands more fireworks as the share of costs paid falls Shares add up to one: SA+SE=1 Lindahl prices: Each person faces a personalized price per unit of the public good, which depends on the tax share
7 Direct Democracy: Example of Lindahl’s procedure • Figure 6.1 shows the relationship between each person’s tax share & quantity of fireworks demanded. • Each person demands more fireworks as the share of costs paid falls. • Shares add up to one: SA+SE=1 • Lindahl prices: Each person faces a “personalized price” per unit of the public good, which depends on the tax share
Direct Democracy EXample of Lindahl's procedure Equilibrium: set of Lindahl prices such that each person votes for the same quantity of the public good In Figure 6.1, this occurs at quantity r and each persons share is measured on theⅹ-axis
8 Direct Democracy: Example of Lindahl’s procedure • Equilibrium: set of Lindahl prices such that each person votes for the same quantity of the public good. • In Figure 6.1, this occurs at quantity r* , and each person’s share is measured on the x-axis
Direct Democracy Feasibility of Indah,'s procedure Could imagine an auctioneer announces initial set of tax schedules then adam Eve vote on quantity of fireworks If they agree on quantity, stop. Otherwise, continue process with new tax shares Would converge tor, which is Pareto efficient
9 Direct Democracy: Feasibility of Lindahl’s procedure • Could imagine an auctioneer announces initial set of tax schedules, then Adam & Eve vote on quantity of fireworks. – If they agree on quantity, stop. Otherwise, continue process with new tax shares. • Would converge to r* , which is Pareto efficient
Direct Democracy Feasibility of Indah,'s procedure Problems Assumes people vote sincerely Strategic behavior(e. g, misrepresenting ones preferences) may prevent Lindahl equilibrium Finding tax shares may take a lot of time Imagine many parties, not just two 10
10 Direct Democracy: Feasibility of Lindahl’s procedure • Problems: • Assumes people vote sincerely – Strategic behavior (e.g., misrepresenting one’s preferences) may prevent Lindahl equilibrium • Finding tax shares may take a lot of time. – Imagine many parties, not just two