CHAPTER 7 - POLITICAL ECONOMICS

Thursday, 17 October, 2019 9:14 PM

Leaning objectives:
1) To outline the issues with voting and logrolling
2) To explore the idea of the self-interested bureaucrat
3) To reintroduce the concept of rent-seeking

Political economy: The field that applies economic principles to the analysis of political decision making.

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Feasibility of Unanimity Rules:
• It assumes people vote sincerely. If each party can guess the maximum amount they would spend for the public good rather than do without
them, they can force each other to that allocation. This prevents them from reaching the Lindahl equilibrium
• Finding the mutually agreeable tax shares may take a lot of time because in actuality it will involve a lot of people, and often it may result in no
decisions being made at all.

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However, majority decision rules do not always yield such clear-cut results.

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The ultimate outcome depends crucially on the order in which the votes are taken. If the first election is between A and B and the winner A runs against
C, then C is the ultimate choice. If the first election is B vs C, the winner B runs against A, then A is chosen. The ability to control the order of voting - the
agenda - confers great power. (Agenda manipulation)

Problem with paired voting --> voting can go one forever, one keeps challenging one after another. (Cycling - when paired majority voting on more than
two possibilities goes on indefinitely without a conclusion ever being reached)

Peak: A point on the graph of an individual's preferences at which all the neighbouring points have lower utility.
Single-peaked preferences: Utility consistently falls as a voter moves away from his or her most preferred outcome.
Double-peaked preferences: If, as a voter moves away from his or her most preferred outcome, utility goes down but then goes up again.

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Because multipeaked preferences can throw a wrench into majority voting, it is important to know whether they are likely to be important as a practical
matter.

Median voter: The voter whose preferences lie in the middle of the set of all voters' preferences; half the voters want more of the item selected and
half want less.
Median voter theorem: As long as all preferences are single peaked and several other conditions are satisfied, the outcome of majority voting reflects
the preferences of the median voter.

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Logrolling - the trading of votes to obtain passage of package of legislative proposals.

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If each project is voted on separately, none is adopted even though each yields positive net benefits. However, with vote trading social welfare is
improved.

The problem:-

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The budget-maximizing model is a stream of public choice theory and rational choice analysis in public administration inaugurated
by William Niskanen. Niskanen first presented the idea in 1968,[1] and later developed it into a book published in 1971.[2] According to the budget-
maximizing model, rational bureaucrats will always and everywhere seek to increase their budgets in order to increase their own power, thereby
contributing strongly to state growth and potentially reducing social efficiency. The bureau-shaping model has been developed as a response to
the budget-maximizing model. Niskanen's inspiration could also have been Parkinson's law sixteen years earlier (1955).

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In rent-seeking model, deadweight loss might actually be larger. Rent-seeking can use up resources that could have been used to produce new goods
and services, hence area abcd does not represent a mere lump-sum transfer; it is a measure of real resources used up to maintain a position of market
power. If short, according to this view, the DWL associated with the rent-seeking can be substantial.

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