Transcript Political economy

POLITICAL ECONOMY
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
1

Political economy applies economic principles to
the understanding of political decision-making.

Political economy models assume that
individuals view government as a mechanism for
maximizing their self interest:
1. selfishness does not necessarily lead to
inefficient outcomes.
2. while the max. assumption may not be totally
accurate, just as in more conventional settings, it
provides a good starting point for analysis
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
2
I. DIRECT DEMOCRACY

Direct democracy- how well they translate the
preferences of their members into collective
action.

Democratic societies use various voting
procedures to decide on public expenditures.
1. Unanimity (Oy birliği) Rules: If a vote were
taken on whether to provide an efficient
quantity of the good, consent would be
unanimous as long as there was a suitable tax
system to finance it.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
3


Lindahl Prices: When individual votes for a
public good, he/she faces a personalized
price per unit of public good which depends
on his/her tax shares which are called
Lindahl prices.
Lindahl Model has two problems:
 It assumes people vote sincerely.
 It may take a long time to find mutually
agreeable tax shares.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
4

This model is similar in terms of role of taxes and
market theory of demand. But there is an important
difference:

instead of each individual facing the same prices,
each faces a personalized price per unit of public
good which depends on his tax shares.

An equilibrium is a set of Lindahl prices such that at
those prices each person votes for the same
quantity of public good x*.

Although the Lindahl model is agreeable to everyone,
the problem is how to reach the equilibrium. The
determination of the quantity of public goods is quite
similar to the market process and it is a Paretoefficient allocation.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
5
2. Majority voting rules (Oy Çokluğu): Unanimity is
clearly difficult to attain. With a majority voting rule,
one more than half of voters must favor a measure
for it to be approved.

Although each individual voter’s preferences are
consistent, the society’s may not be consistent.
This is called voting paradox.

Sometimes the ultimate outcome depends crucially
on the order in which the votes are taken in. Under
such circumstances, agenda manipulation
(process of organizing the order of votes to assure
a favorable outcome) confers great power.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
6

Paired voting can go on forever without reaching a
decision. The process can continue indefinitely, a
phenomenon called cycling.

Cycling problem depends on the structure of
preferences for various levels of the good provided.

Peak: A point in an individual's preferences at which
all the neighboring points are lower.

A voter has single peaked preferences if, as she
moves away from the most preferred outcome, in any
and all directions, utility consistently falls.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
7

Voter has double peaked preferences if, as she
moves away from the most preferred outcomes,
utility goes down but then goes up again.

Median voter theorem: Suppose all alternatives
being considered represent smaller or greater
amounts of a characteristic. People rank each
alternative on the basis of this characteristic.
As long as all preferences are single peaked, the
outcome of majority voting reflects the preferences
of the median voter.

Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
8


Median voter: voter whose preferences lie in
the middle of the set of all voters’ preferences.
Median voter theorem imperfections:
 Multi-peaked preferences
 May be inefficient in terms of benefits and
costs.
 Results may differ on the particular item
being studied.
 Does not allow people to register how
strongly they feel about the issues.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
9
3. Logrolling: (Karşılıklı Destek) allows people to treat
votes and register how strongly they feel about
various issues.

Vote trading is controversial. Its proponents argue
that trading votes leads to efficient provision of public
goods, just as trading commodities leads to efficient
provision of private goods. They also emphasize its
potential for revealing the intensity of preferences
and establishing a stable equilibrium.

With logrolling, a majority of voters can form a
coalition to vote for projects that serve their interests
but whose costs are borne mainly by the minority.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
10
4. Arrow’s Impossibility Theorem: In a democratic
society, a collective decision making rule should
satisfy the following criteria:






It can produce a decision whatever the
configuration of voters’ preferences.
It must be able to rank all possible outcomes.
It must be responsive to individuals’ preferences.
It must be consistent (A to B, B to C, so A to C).
Society’s ranking of A and B depends only on
individuals, ranking of A and B.
Dictatorship is ruled out.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
11

In general, it is impossible to find a rule that
satisfies all this criteria.

A democratic society cannot be expected to
be able to make consistent decisions.

Arrow’s theorem states that it cannot be
guaranteed that the society will be able to find a
consistent decision-making rule. If members of
society have identical preferences, no problems
would arise.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
12
II. REPRESENTATIVE DEMOCRACY

Representative Democracy: Decisions are not
made by individuals but their elected
representatives.

A realistic political economy model must study the
goals and behavior of the people who govern.
Models of government action based on these
individuals’ motivations and behavior must be
analyzed. People in government are assumed to
maximize their self interest.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
13
1. Elected politicians




Citizens elect representatives who make decisions on their
behalf. A vote-max politician adopts the preferred program
of the median voter.
Two party systems tend to be stable in the sense that both
parties stake out near the “center”.
The replacement of direct referenda by a representative
system has no effect on the outcome. Both simply mirror
the preferences of median voter.
Important issues to be considered:

Single dimensional rankings

Ideology

Personality

Leadership

Decision to vote (free rider problem)
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
14
2. Public employees

The precise way a program is run is in the
hands of bureaucrats. These people are
target of criticism for being unresponsive,
creating excessive red tape, etc.

Bureaucrats provide valuable technical
expertise in design and execution of
programs. But a bureaucrat’s only aim is not
to interpret and passively fulfill the wishes of
the electorate and its representatives.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
15

Niskaken (1971):In the market-oriented private
sector, an individual who wants to get ahead,
does so by making his/her company on items as
profitable as possible but bureaucrats tend to
focus on power and patronage because
opportunities for monetary gains are minimal.

Bureaucrats have incentives to expend effort on
promotional activities to increase the sponsor’s
perceptions of the office’s benefits, to shift the
value of the company up. This is analogous to
advertising in the private sector.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
16
3. Special interests

People with common interests can exercise disproportionate
power by acting together. The members of such a group may
have higher voter participation rates than population as a whole,
or members might be willing to spend money for campaigns.

The basis for the establishment of such interest may be
1. Source of income: Capital or labor
2. Size of income
3. Source of income: Industry of Employment (sector)
4. Region
5. Demographic and personal characteristics (old-young, singlemarried)
6. Rent-seeking
4. Other actors

Judiciary, journalists, experts.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
17
III. GOVERNMENT GROWTH
1. Citizen preferences

G=f(P,I)

Such a demand function can lead to an
increasing proportion of income devoted to
public sector.

Government growth could well be a
consequence of wishes of voters, who rationally
take into account its opportunity cost in terms of
forgone consumption in private sector.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
18
2. Marxist view

The private sector tends to overproduce, so the
capitalist-controlled government must expand
expenditures to absorb this production. The main
contribution of marxist analysis is its explicit
recognition as sources of economic growth.
3. Chance events

External shocks to the economic and social
system may require higher levels of government
expenditure.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
19
4. Societal attitudes
5. Income redistribution

Politicians can attract voters whose incomes
are at or below the median by offering benefits
that impose a net cost on those whose
incomes are above the median.
Assoc. Prof. Y.Kuştepeli
ECN 242 PUBLIC ECONOMICS
20