1. McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 6 POLITICAL ECONOMY

2. 6-2 Direct Democracy-Unanimity Rules r per year 0 0’ Adam’s share (S A ) Eve’s share (S E ) DrADrA The Lindahl Model DrEDrE r* S*

3. 6-3 Feasibility of Unanimity Rules  Reaching equilibrium  Practical problems Strategic behavior time to reach equilibrium

4. 6-4 Direct Democracy-Majority Voting Rules  Majority voting rule – one more than half of the voters must favor a measure for it to be approved Voter ChoiceBradJenAngelina FirstACB SecondBBC ThirdCAA

5. 6-5 Direct Democracy-Majority Voting Rules  Voting Paradox – community preferences can be inconsistent even though individual’s preferences are consistent  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 Voter ChoiceBradJenAngelina FirstACB SecondBAC ThirdCBA

6. 6-6 Graphing Preferences Missiles Utility A BC Brad Jen Angelina Single-peaked preferences Double-peaked preferences

7. 6-7 Practical Importance of Double-peaked Preferences  Availability of private substitutes  Issues ranked along single dimension

8. 6-8 Direct Democracy - The Median Voter Theorem VoterExpenditure Donald$5 Daisy100 Huey150 Dewey160 Louie700

9. 6-9 Direct Democracy - Logrolling I Voter ProjectMelanieRhettScarletTotal Net Benefits Hospital200-50-5595 Library-40150-3080 Pool-120-60400220

10. 6-10 Direct Democracy - Logrolling II Voter ProjectMelanieRhettScarletTotal Net Benefits Hospital200-110-105-15 Library-40150-120-10 Pool-270-140400-10

11. 6-11 Direct Democracy - Arrow’s Impossibility Theorem  “Reasonable” collective decision-making 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 Independence of irrelevant alternatives Dictatorship ruled out  Arrow’s Impossibility Theorem All conceivable voting schemes have some potential for being unfair or producing a paradoxical result  Meaning of theorem consistent rule not necessarily impossible to find, but cannot be guaranteed  Buchanan’s critique  Use of social welfare functions

12. 6-12 Representative Democracy - Elected Politicians Number of Voters LiberalConservative

13. 6-13 Implications of the Median Voter Model  Two-party systems tend to be stable  Replacement of direct referenda by representative system has no effect on outcomes

14. 6-14 Other Factors Influencing Voting  Single-dimensional rankings  Ideology  Personality  Leadership  Decision to vote

15. 6-15 Representative Democracy-Public Employees  Function of bureaucrats  Goals of bureaucrats

16. 6-16 Niskanen’s Model of Bureaucracy Q per year $ 0 V C Q* Efficient output Q bc Actual output

17. 6-17 Representative Democracy – Special Interests  What are “Special Interests”  Establishment of Special Interest Groups Source of Income: Capital or Labor Size of Income Source of Income: Industry of Employment Region Demographic and Personal Characteristics

18. 6-18 Representative Democracy – Rent-Seeking tons of peanuts per year $ S=MC D MR Rents

19. 6-19 Representative Democracy – Other Actors  Judiciary  Journalists  Experts

20. 6-20 Explaining Government Growth  Citizen Preferences G = f(P, I)  Marxist View  Chance Events  Changes in Social Attitudes  Income Redistribution

21. 6-21 Controlling Government Growth  Government growth as a non-issue  Government growth as a problem Commitments made in the past Basic flaws in the political system

22. 6-22 Improving the Workings of the Political System  Change bureaucratic incentives financial incentives privatization  Change Fiscal Institutions Budget Enforcement Act (BEA) – 1990 Balanced budget rules at the state level  Institute Constitutional Limitations Balanced budget amendment

23. 6-23 Provisions of a Typical Balanced Budget Amendment 1. Congress must adopt a budget statement “in which total outlays are no greater than total receipts” 2. Total receipts may not increase “by a rate greater than the rate of increase in national income” 3. “The Congress and President shall…ensure that actual outlays do not exceed the outlays set forth in the budget statement” 4. The provisions can be overridden in times of war

24. 6-24 Critique of Balanced Budget Amendments  Forecasting issues  Definitional issues  Penalties for violation of the law  Economic issues