Learning outcome of this chapter: Identify the critical assumptions of the two-sector model, define what is meant by a Pareto-optimal allocation of resources; articulate the three conditions for a general equilibrium; distinguish between allocative efficiency, X-efficiency, and ‘dynamic’ efficiency (or economic growth); discuss the broad categories of market failure; explain the allocative, distributive, and stabilisation functions of government; distinguish between direct and indirect forms of government intervention. | POLITICAL ECONOMY Chapter 6 Political Economy The field that applies economic principles to the analysis of political decision-making. How well do various decision-making procedures translate the preferences of their citizens into collective action? 6- Direct Democracy Unanimity Rules r per year 0 0’ Adam’s share (SA) Eve’s share (SE) The Lindahl Model r* S* Given efficient quantity level r* and demand curves, Adam pays 0-S* and Eve pays 0’-S*. Unanimity can result in efficient level if Lindahl price – tax share per individual – were allowed 6- box and labels 1st click – Adam’s D 2nd click – Eve’s D 3rh click – equilibrium r and S Feasibility of Unanimity Rules in Reaching Equilibrium Practical problems Strategic behavior: do people vote sincerely or under report value to escape tax liability? Time to reach equilibrium given many citizens. 6- Direct Democracy Majority Voting Rules Majority voting rule – one more than half of the voters must favor a measure for | POLITICAL ECONOMY Chapter 6 Political Economy The field that applies economic principles to the analysis of political decision-making. How well do various decision-making procedures translate the preferences of their citizens into collective action? 6- Direct Democracy Unanimity Rules r per year 0 0’ Adam’s share (SA) Eve’s share (SE) The Lindahl Model r* S* Given efficient quantity level r* and demand curves, Adam pays 0-S* and Eve pays 0’-S*. Unanimity can result in efficient level if Lindahl price – tax share per individual – were allowed 6- box and labels 1st click – Adam’s D 2nd click – Eve’s D 3rh click – equilibrium r and S Feasibility of Unanimity Rules in Reaching Equilibrium Practical problems Strategic behavior: do people vote sincerely or under report value to escape tax liability? Time to reach equilibrium given many citizens. 6- Direct Democracy Majority Voting Rules Majority voting rule – one more than half of the voters must favor a measure for it to be approved However, majority voting does not always yield clear-cut results Given the voter preferences to the right, “B” always wins against opponents Voter Choice Brad Jen Angelina First A C B Second B B C Third C A A 6- Majority Voting Does Not Always Yield Clear-Cut Results: Double- vs. Single-Peaked Preferences Voting Paradox – Community preferences can be inconsistent even though individual’s preferences are consistent Given new preferences at the right: A vs. B → A wins B vs. C → B wins A vs. C → C wins Agenda Manipulation – Process of organizing order of votes to ensure a favorable outcome Cycling – when paired voting on more than two possibilities goes on indefinitely without a conclusion ever being reached 6- Voter Choice Brad Jen Angelina First A C B Second B A C Third C B A Graphing Preferences Missiles Utility A B C Brad Jen Angelina Single-peaked preferences Double-peaked preferences 6- axes and labels 1st click – Brad 2nd click – Jen 3rd .
