Intro to Economics - Political Economy

7/31/2019 Intro to Economics - Political Economy

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Political Economy

Dr. Katherine Sauer

A Citizens Guide to Economics

ECO 1040


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Overview:

I. To Be or Not To Be (Informed)II. Voting Models


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Political Economy is a branch of economics that studies

government using the analytical tools from economics


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I. To Be or Not To Be (Informed)

A. Voters and the incentive to be ignorant

Being informed is a good thing, but becoming informed

on an issue comes at a price.

Economists say that voters are rationally ignorant about

politics.

- the benefits of being informed are less than the

cost of becoming informed

There are low incentives to become informed about

politics.


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Why voters may choose to be rationally ignorant about

local issues:- too many - not relevant to your life

- not seem important - hard to find info

Why voters may choose to be rationally ignorant about

national issues:- vote doesnt matter - too much info

- not relevant to your life - negativity


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Another problem is people having misperceptions about

issues.

Example: Out of the following list, which are the twomost costly government spending items?

Defense

Foreign Aid

Interest on the Federal Debt

Social Security

Welfare

In polls, most people think it is foreign aid and welfare.

Defense and Social Security by far are the largest

programs.


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Why Rational Ignorance Matters:1. If voters dont know much about the issue, it is

difficult for them to make informed decisions.

2. Rationally ignorant voters often make decisionson the basis of low quality, unreliable, or biased

information.

3. Not everyone is rationally ignorant.


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B. Special Interests and the Incentive to Be Informed

Often time the costs of a government action are diffusewhile the benefits are concentrated.

- the group wanting the benefit has the incentive to

be very well informed

- the voters (taxpayers) foot the bill and have the

incentive to be rationally ignorant

In 1975, there were 3,000 registered lobbyists. (national)

Today, there are over 35,000.

- There are100 Senators and 435 House members!


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When the benefits are concentrated and the costs are

diffuse, resources can be wasted on projects with low

social benefits and high social costs.

A single policy might only waste a million or billion

dollars.

Added up an economy may end up with hundreds of

inefficient policies and billions of wasted tax dollars.

It is not sustainable to pass policies that have higher costs

than benefits.


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II. Voting Models

A. Types of Voting Systems

1. Simple Majority

A candidate or ballot choice wins with 51% of the votes.

If there are more than 2 choices on the ballot, sometimes

a winner may not be found by majority rule.


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2. Plurality Voting

The choice with the most votes wins.

The winner may or may not have a majority of the

votes.


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3. Borda Rule

Let voters rankeach possible outcome.

Assign points to each rank.

The outcome with the most total points wins.

Ex. Imagine that Tennessee is having an election on the

location of its capital. The population of Tennessee isconcentrated around its four major cities, which are spread

throughout the state. Suppose that everyone wants to live

as near the capital as possible.


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42% of voters

(close to

Memphis)

26% of voters

(close to

Nashville)

15% of voters

(close to

Chattanooga)

17% of voters

(close to

Knoxville)

Memphis

NashvilleChattanooga

Knoxville

Nashville

ChattanoogaKnoxville

Memphis

Chattanooga

KnoxvilleNashville

Memphis

Knoxville

ChattanoogaNashville

Memphis

For each type of voter, assign 4 points to the highestranked choice, 3 points to the next highest choice,

and so on.


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42% of voters

(close to

Memphis)

26% of voters

(close to

Nashville)

15% of voters

(close to

Chattanooga)

17% of voters

(close to

Knoxville)

4Memphis

3Nashville2Chattanooga

1Knoxville

4Nashville

3Chattanooga2Knoxville

1Memphis

4Chattanooga

3Knoxville2Nashville

1Memphis

4Knoxville

3Chattanooga2Nashville

1Memphis

Memphis:

42x4 + 26x1 + 15x1 + 17x1 = 226

Nashville:

42x3 + 26x4 + 15x2 + 17x2 = 294

Chattanooga:42x2 + 26x3 + 15x4 + 17x3 = 273

Knoxville:

42x1 + 26x2 + 15x3 + 17x4 = 207

Nashville wins.


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B. A Problem with Majority Voting

For ballots that use majority voting rules, the ballot often

has to be narrowed to 2 choices.

- ensures there will be a clear winner

Often times, there are more choices than just 2 to start

with.

- need to narrow the choices

Sometimes the choices are arbitrarily determined,

sometimes an initial election is held and then the top vote

getters are subject to a run off.


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Example:

Suppose a city is deciding where to locate a new park and there

are 3 possible options: south, central, east.

Also suppose there are 3 types of voters (type 1, 2, and 3) who

have different preference about the location of the park.

Presumably, they will vote to have the park located nearby to

where they live. voter type

type 1 type 2 type 3

Percent of the voters 35% 45% 20%

first choice south central eastsecond choice central east south

third choice east south central


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voter type



first choice south central east

second choice central east south


Suppose the ballot pits south versus central. Which would win?

type 1: 35% vote for south

type 2: 45% vote for central

type 3: 20% vote for southsouth wins


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voter type






Suppose the ballot pits location central versus east. Which would

win?

type 1: 35% vote for central

type 2: 45% vote for centraltype 3: 20% vote for east

central wins


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voter type






Suppose the ballot pits location south versus east. Which would win?

type 1: 35% vote for south

type 2: 45% vote for east

type 3: 20% vote for easteast wins


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When the choice is south versus central, south wins.When the choice is central versus east, central wins.

The transitive property would tell us that when the vote is

south versus east, south should win.

But in reality, when the choice is south versus east, east

wins!


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This is known as the Condorcet Paradox: the failure

of majority rule to produce transitive preferences for

society.

2 lessons:

1. Agenda-setting power matters!!!!!!

2. Majority voting doesnt tell us what outcome

a society really wants.


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C. The Median Voter Theorem

says that under majority rule, the outcome will be the

one favored by the median voter.

- person in the center of the distribution of

preferences


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ex: 40% of people want money spent on national parks,

60% want nothing spent on national parks.

- the median voter would have a preference ofno spending

60% want no

spending

40% want

spending

median voter

50%


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Ex: Suppose voters have the following preferences:

15% of the voters want to increase spending on education

by no less than $2000 per student


by around $1500 per student


by around $1000 per student

35% of the voters want to increase spending on educationby around $500 per student


by $0 per student


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10%

want $035%

want $500

15%

want $1000

25%

want $1500

15%

want $2000

median voter

50%

The increase in spending on education is likely to be

$1000.


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Summary:

The individual voter may have an incentive to remain

rationally ignorant.

Special interest groups have an incentive to be well-

informed.

Different voting rules produce different outcomes.


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What did you learn today?

Please explain 2 concepts from todays class.

Documents

Intro to Economics - Political Economy