chap06 political economy

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1、Chapter6–PoliticalEconomyPublicEconomics1PoliticalEconomyDefinedPoliticalEconomyistheapplicationofeconomicprinciplestotheanalysisofpoliticaldecisionmaking.Self-interest–inthemarketplace,thisoftenleadstoefficiency;differentimplicationsin“politicalmarket.”Maximization–onegoalmaybetom

2、aximizesocialwelfare.2DirectDemocracySeveralkindsofvotingprocedures:UnanimityrulesMajorityvotingrulesLogrollingProblemswithalloftheserules:Arrow’sImpossibilityTheorem3DirectDemocracy:UnanimityrulesUnanimityrules:Allpartiesmustagreeforapolicytobeimplemented.Example:Inprinciple,soci

3、etycouldagreethatapublicgoodshouldbeprovidedratherthannotbeingprovided.Lindahlpricesdesignedtoelicitunanimousagreementforprovisionofpublicgood.4DirectDemocracy:ExampleofLindahl’sprocedure2individuals,Adam&EveFireworksdisplay(publicgood,denoteasr)SA=Adam’sshareoftotalcostoffirework

4、sprovisionForanygivenshare,SA,Adamdemandssomequantityoffireworks.5Figure6.16DirectDemocracy:ExampleofLindahl’sprocedureFigure6.1showstherelationshipbetweeneachperson’staxshare&quantityoffireworksdemanded.Eachpersondemandsmorefireworksastheshareofcostspaidfalls.Sharesadduptoone:SA+

5、SE=1Lindahlprices:Eachpersonfacesa“personalizedprice”perunitofthepublicgood,whichdependsonthetaxshare.7DirectDemocracy:ExampleofLindahl’sprocedureEquilibrium:setofLindahlpricessuchthateachpersonvotesforthesamequantityofthepublicgood.InFigure6.1,thisoccursatquantityr*,andeachperson

6、’sshareismeasuredonthex-axis.8DirectDemocracy:FeasibilityofLindahl’sprocedureCouldimagineanauctioneerannouncesinitialsetoftaxschedules,thenAdam&Evevoteonquantityoffireworks.Iftheyagreeonquantity,stop.Otherwise,continueprocesswithnewtaxshares.Wouldconvergetor*,whichisParetoefficien

7、t.9DirectDemocracy:FeasibilityofLindahl’sprocedureProblems:AssumespeoplevotesincerelyStrategicbehavior(e.g.,misrepresentingone’spreferences)maypreventLindahlequilibriumFindingtaxsharesmaytakealotoftime.Imaginemanyparties,notjusttwo.10DirectDemocracy:MajorityVotingrulesMajorityVot

8、ingrules:onemorethanhalfof