Gruber Chapter 9/Stiglitz Chapter 6

Contracting out

: An approach through which the government retains responsibility for providing a good or service but hires private-sector firms to actually provide the good or service.

Direct democracy uses referenda and voter initiatives. Referendum Voter initiative:

: A measure placed on the ballot by the government allowing citizens to vote on state laws or constitutional amendments that have already been passed by the state legislature. :The placement of legislation on the ballot by citizens.

Government Failure and The Great Ideological Debate

"Markets work well, and market failures are mostly government failures" +++Begins with asumption that government officials are self serving Markets work well under certain social conditions which require government maintenance +++Belief that powerful private interests will exploit weaker members of society if not held in check

Corruption also appears more rampant in political systems that feature more red tape, bureaucratic barriers that make it costly to do business in a country

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Problems with the median voter model make lobbying likely.

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STIGLITZ POSITION: A few powerful private interests have far too much influence over public policy Bankers have too much say in who gets appointed to financial regulatory positions (They all seem to come from Goldman Sachs!) Natural resource extractors are given access to public lands at a fraction of the market cost. ++++Oil revenues used to fund the UC Losses to the public from the corruption problems identified by Gruber are miniscule compared to those identified by Stiglitz.

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To consistently aggregate preferences, majority voting must satisfy three goals:

-Dominance -Transitivity -Independence of irrelevant alternatives

Leviathan theory:

-Government attempts to grow as large as possible. -Voters cannot trust the government to spend their tax dollars efficiently. -Must design ways to combat government greed.

Problems with Lindahl Pricing Preference revelation problem: Preference knowledge problem: Preference aggregation problem:

-Individuals have an incentive to lie about their WTP, to lower their price. Individuals may not know their WTP. It is not obvious how to aggregate individual preferences into a social welfare function.

The median voter model relies on several assumptions. 1.Single-dimensional voting 2.Only two candidates 3.No ideology or influence 4.No selective voting 5.No money Full information

-The median voter model assumes that voters are basing their votes on a single issue. -Representatives are elected on a bundle of issues ++++++++++++++++++++++ The model assumes only two candidates -No equilibrium in the model with three or more candidates: There is always an incentive to move in response to your opponents' positions. +++++++++++++++++++++++++ -The median voter theory assumes that politicians care only about maximizing votes. -Ideological convictions could lead politicians to position themselves away from the center of the spectrum and the median voter. ++++++++++++++++++++++ The median voter theory assumes that all people affected by public goods vote. In fact, only a fraction of citizens vote in the United States. ++++++++++++++++++++++++++ The median voter theory ignores the role of money as a tool of influence in elections. -If taking an extreme position on a given topic maximizes fundraising, even if it does not directly maximize votes on that topic, it may serve the long-run interests of overall vote maximization by allowing the candidate to advertise more. ++++++++++++++++++++++++++ The median voter model assumes perfect information along three dimensions: Voter knowledge of the issues Politician knowledge of the issues Politician knowledge of voter preferences All three of these assumptions are unrealistic.

The government is a collection of individuals who have the difficult task of aggregating the preferences of a large set of citizens. -The core model of representative democracy suggests that governments pursue policies preferred by the median voter. Evidence for this model is mixed.

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Lindahl pricing: ++++++++++++++++++++++Benefit taxation:

:An approach to financing public goods in which individuals honestly reveal their willingness to pay and the government charges them that amount to finance the public good. ++Under Lindahl pricing, the government produces the efficient amount of the public good. ++Lindahl pricing requires unanimous consent to implement the public good. +++++++++++++++++++++++++ :Taxation in which individuals are taxed for a public good according to their valuation of the benefit they receive from that good.

Natural monopoly:

A market in which, because of the uniformly decreasing marginal cost of production, there is a cost advantage to have only one firm provide the good to all consumers in a market. Might be addressed through contracting out.

Majority Voting: When It Doesn't Work

Cycling: When majority voting does not deliver a consistent aggregation of individual preferences

Lobbying and the Free Rider Problem

Lobbying suffers from the free rider problem: -Many bills benefit a small number of people a great deal and harm a huge number of people by a small amount. -The smaller groups are much more able to organize and so can raise money to lobby more effectively. -Thus, lobbying helps pass inefficient bills.

Majority voting and the median voter theorem outcome are potentially inefficient.

Majority voting does not recognize intensity of preferences.

Median Voter Theorem: Median voter:

Majority voting will yield the outcome preferred by the median voter if preferences are single-peaked. The voter whose tastes are in the middle of the set of voters.

One way to avoid the impossibility problem is to restrict preferences. Single-peaked preferences:

Preferences with only a single local maximum, or peak, so that utility falls as choices move away in any direction from that peak +With single peaked preferences, voting works well

budget-maximizing bureaucrat

The budget-maximizing bureaucrat runs an agency that has a monopoly on the government provision of some good or service. Maximizes his own revenue or influence.

Arrow's Impossibility Theorem:

There is no social decision (voting) rule that converts individual preferences into a consistent aggregate decision without either (a) restricting preferences or (b) imposing a dictatorship.