QUESTION 5.

(A) State and explain the assumptions Kenneth Arrow made about social welfare
functions in deriving his impossibility theorem. By providing an example, explain
which of these assumptions is violated by majority rule? [50 marks]

Kenneth Arrow's impossibility theorem, also known as Arrow's theorem, is a fundamental

result in social choice theory. It addresses the challenge of aggregating individual preferences
into a collective decision. Arrow made several assumptions about social welfare functions in
his analysis, and violation of one of these assumptions is indeed evident in the case of
majority rule.

Universal Domain: Arrow assumed that the social welfare function should be defined for all
possible individual preference orderings. This means that any conceivable preference profile
should be accommodated. However, majority rule violates this assumption because it only
considers a subset of preferences—those of the majority. Preferences of the minority are
disregarded, leading to a limited domain of the social welfare function.

Example: Suppose there are three individuals, A, B, and C, and three alternatives, X, Y, and
Z. their preferences are as follows:

A: X > Y > Z

B: Y > Z > X

C: Z > X > Y

Under majority rule, the alternative preferred by the majority prevails. In this example, the
majority preferences are:

A: X > Y > Z

B: Y > Z > X

The majority prefers X over Y and Z. As a result, alternative X would be chosen,

disregarding the preference of individual C. Thus, the universal domain assumption is
violated.

Individual Sovereignty: Arrow assumed that each individual's preferences should be given
equal importance and that an individual should have the freedom to rank alternatives
according to their own subjective judgment. This implies that no individual's preferences
should be overridden by others. However, majority rule violates this assumption because the
preferences of the minority are subordinated to those of the majority.

Example: Continuing with the previous example, individual C's preferred order is Z > X > Y.
However, under majority rule, alternative Z is not chosen since it does not have majority
support. Individual C's preferences are overridden, and their sovereignty is compromised.

Non-dictatorship: Arrow assumed that no single individual should have the power to
determine the collective outcome regardless of others' preferences. In other words, the social
welfare function should not be dictated by a single person's preferences. Majority rule
satisfies this assumption since no individual acts as a permanent dictator. However, it violates
the other assumptions.

Unanimity: Arrow assumed that if every individual prefers one alternative over another, then
the social welfare function should reflect this preference. This means that if everyone agrees
on a particular order of alternatives, the social choice should reflect that unanimous
preference. Majority rule does not satisfy this assumption because it can lead to outcomes
that are not unanimously preferred.

Example: Consider a scenario where there are three individuals, A, B, and C, and three
alternatives, X, Y, and Z. Their preferences are as follows:

A: X > Y > Z

B: Y > Z > X

C: Z > X > Y

Under majority rule, alternative X would be chosen as it has the majority support (A and B
prefer X over Y and Z). However, this outcome is not unanimously preferred since individual
C prefers alternative Z over X. Therefore, the unanimity assumption is violated.

Independence of Irrelevant Alternatives: Arrow assumed that the social preference

between two alternatives should solely depend on the individual preferences between those
alternatives. This means that the introduction or removal of irrelevant alternatives should not
influence the ranking of the remaining alternatives. Majority rule generally satisfies this
assumption.

Example: Suppose we have three individuals, A, B, and C, and three alternatives, X, Y, and
Z. Their preferences are as follows:
A: X > Y > Z

B: Y > X > Z

C: Z > Y > X

Under majority rule, alternative X would be chosen since it has the majority support. Now,
let's consider a scenario where alternative W is introduced:

A: X > Y > Z > W

B: Y > X > Z > W

C: Z > Y > X > W

Even with the introduction of alternative W, the majority still prefers alternative X over the
others. Therefore, the independence of irrelevant alternatives is satisfied by majority rule in
this example.

The majority rule violates the universal domain assumption by disregarding the preferences
of the minority. It also undermines individual sovereignty by prioritizing the preferences of
the majority over those of the minority. However, it does not violate the non-dictatorship
assumption since no individual is a permanent dictator, as the outcome depends on the
majority's preferences in each decision.

(B) Assume that individual preferences are restricted to be single-peaked. Demonstrate

that majority rule now satisfies all of Arrow’s remaining assumptions. [50 marks]

Unanimity: In the case of single-peaked preferences, if every individual's preference peaks at

the same alternative, then that alternative is the unanimous preference. Under majority rule, if
a particular alternative is the peak preference for every individual, it will also be the majority
choice. Thus, the unanimity assumption is satisfied. If all individuals have single-peaked
preferences and their peaks coincide at a particular alternative, then that alternative will have
the highest overall ranking. Since majority rule selects the alternative preferred by the
majority, it will choose the alternative that aligns with the unanimous peak preference. Thus,
the unanimity assumption is satisfied.

Independence of Irrelevant Alternatives: With single-peaked preferences, the introduction or

removal of irrelevant alternatives does not change the ordering of the remaining alternatives.
Since preferences decrease as alternatives move away from the peak, the ranking of
alternatives is solely determined by their relative positions to the peak. Majority rule, which
selects the alternative preferred by the majority, will always choose the alternative located
closest to the peak. Therefore, the independence of irrelevant alternatives is satisfied.

In the case of single-peaked preferences, the ranking of alternatives is determined by their

relative positions to the peak preference. The presence or absence of irrelevant alternatives
that lie outside the range of the peak preference does not alter the relative positions of the
remaining alternatives. Majority rule, by selecting the alternative preferred by the majority,
will always choose the alternative closest to the peak preference. Therefore, the independence
of irrelevant alternatives is satisfied.

By assuming single-peaked preferences, majority rule fulfills the unanimity and

independence of irrelevant alternatives assumptions, along with the non-dictatorship
assumption that it already satisfied. It is important to note that the universal domain
assumption is still violated by majority rule since it only considers the preferences of the
majority, disregarding the preferences of the minority.

While the assumption of single-peaked preferences allows majority rule to satisfy these
assumptions, it is worth noting that this assumption may not always hold in real-world
situations, and other decision-making methods may need to be considered to address the
challenges of social choice.