Political Economy (ch 9) A. Unanimous Consent on Public Goods Levels 1.

Lindahl Pricing is a way of financing public goods by charging individuals their marginal willingness to pay. - Erik Lindahl in year ________ Marginal Willingness to Pay refers to:

Benefit taxation refers to:

2. Problems with Lindahl Pricing: a. preference revelation problem

b. preference knowledge problem

c. preference aggregation problem

B. Mechanisms for Aggregating Individual Preferences 1. Direct Democracy in the US Direct Democracy means that:

- it remains strong in America at the local level - it has __________________ in the 20th century

Direct Democracy also plays an important role at the state level. A referendum allows citizens to vote on ___________________________________________ that have already been passed by the state legislature. All states allow legislative referenda which means:

24 states allow popular referenda which means:

Voter Initiatives are more frequent than referenda. - if collect enough signatures, then can place legislation on the ballot 24 states allow voter initiatives. - the first two were in Oregon in _______ - about _____________ voter initiatives have been filed since the first

- about _____________ of those actually made it to state ballots and _____ have passed - about __________ of all initiative activity occurs in six states: Arizona, California, Colorado, North Dakota, Oregon, and Washington Initiatives were very popular in the early 20th century (Progressive political movement). - 1911 to 1920 there were _____________ initiatives on state ballots - by the 1960s ___________________________________________ - 1978 California passed Proposition 13 and sparked a wider tax revolt in other states and initiatives ______________________________________________________ - in 1990s __________________________________________________________ - since 1996 ________________________________________________________ 2. Majority Voting: When it Works In practice, the government does not use Lindahl pricing and its unanimous consent. Majority Voting is a common mechanism for: A voting mechanism is successful if it can consistently aggregate individual preferences into a social decision. Conditions for Consistency - dominance

- transitivity

- independence of irrelevant alternatives

In reality, majority voting can produce a consistent aggregation of individual preferences only if preferences are restricted to take a certain form.

3. Majority Voting: When it Doesnt Work Cycling means that majority voting:

Sometimes with majority voting we are unable to aggregate individual preferences into a __________________ social outcome. - this creates agenda setting power which means:

4. Arrows Impossibility Theorem There are certain situations for which ________________________________ can produce a consistent outcome. Nobel Lauriat Kenneth Arrows insight (1951): Arrows Impossibility Theorem says that there is no ____________________________ rule that converts individual preferences into a consistent aggregate decision without either -

Restricting Preferences to Solve the Impossibility Problem Most common way to restrict preferences: impose single-peaked preferences which means:

This makes utility fall as choices move away from the peak (in any direction). By contrast, multi-peaked preferences would:

5. Median Voter Theory If the preferences are single-peaked, then majority voting will deliver a consistent aggregation of preferences of the individual voters. Under this assumption, we can make an even stronger statement about the outcome of majority voting. The Median Voter Theorem says that the majority voting will yield __________________________ ______________________________ if preferences are single-peaked. - the median voter is the voter whos tastes/preferences are in the ____________________ of the set of voters - an ______________ number of voters have tastes for more of the public good as have for less of the public good Potential Inefficiency: - intensity of preference C. Representative Democracy 1. Vote-Maximizing Politicians Represent the Median Voter

2. Assumptions of the Median Voter Model a. Single-Dimensional Voting

b. Only 2 Candidates

c. No Ideology or Influence

d. No Selective Voting

e. No Money

f. Full Information

3. Lobbying is the expending of resources by certain individuals or groups in an attempt to ________________________________________. Politicians listen because -

Lobbying theoretically can serve 2 useful purposes: -

4. Evidence on the Median Voter Model for Representative Democracy

D. Public Choice Theory: The Foundation of Government Failure We typically assume a benign government that is intent on maximizing social welfare. We also assume that politicians strive to represent the will of the people. - 1950s the school of thought called public choice began questioning these assumptions Public Choice Theory says that:

Government Failure is the _______________________ or ________________________ of the government to act primarily in the best interest of its citizens. 1. Size-Maximizing Bureaucracy A bureaucracy is In 1971, William Niskanen developed the model of the ___________________________________. Explain:

Private vs Public Provision

2. Problems with Privatization The benefits of privatization implied by the Niskanen model are subject to two limitations: a. natural monopolies are markets in which there is a _________________________ to having only one firm provide the good - economies of scale are:

In this type of market, pure privatization can end up costing more than contracting out which means:

Competitive Bidding can be used to:

- problems with competitive bidding:

b. It is not clear that the private provision of social services is more efficient than public provision.

3. Leviathan Theory Under this theory, voters cannot trust the government to spend tax dollars efficiently and so must design ways to ___________________________________________.

4. Corruption is the abuse of power by government officials in order to ______________________ _____________________________________________. Why does corruption exist?

Some say the only thing keeping corruption in check is ________________________________ which is the ability of voters to throw out corrupt politicians. Corruption is more prevalent in political systems that have more _____________________. - red tape is bureaucratic barriers that make it costly to do business

Another determinant of corruption appears to be ___________________________________________.