Chapter 9

Preference revelation problem

: Individuals have an incentive to lie about their WTP, to lower their price

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.

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.

Direct democracy:

Voters directly cast ballots in favor of or in opposition to particular public projects.

Representative democracy:

Voters elect representatives, who decide on public projects.

Cycling:

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

Benefit taxation:

taxation in which individuals are taxed for a public good according to their valuation of the benefit they receive from that good.

electoral accountability,

the ability of voters to throw out corrupt regimes.

Preference knowledge problem:

Individuals may not know their WTP.

Lindahl pricing requires

unanimous consent to implement the public good

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Referendum:

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.

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.

Lindahl pricing:

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. based on marginal willingness to pay

Lindahl's procedure operates as follows:

Announce tax prices for the public good. Everyone says how much of the public good she wants at those tax prices. Repeat to construct a marginal willingness to pay schedule for each individual Recall that efficient provision requires that (Total marginal willingness to pay) = MC. 4. Add up individual willingnesses to pay at each quantity of public good provided. 5. Find Q such that total (Total marginal willingness to pay) = MC. 6. Finance the public good by charging individuals their willingnesses to pay for that quantity.

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.

Assumptions of the Median Voter Model: No Ideology or Influence

Ideological convictions could lead politicians to position themselves away from the center of the spectrum and the median voter. assumes politicians only care about maximizing votes

Preference aggregation problem:.

It is not obvious how to aggregate individual preferences into a social welfare function

Median Voter Theorem:

Majority voting will yield the outcome preferred by the median voter if preferences are single-peaked.

Assumptions of the Median Voter Model: 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.

Bureaucracies:

Organizations of civil servants, such as the U.S. Department of Education or a town's Department of Public Works, that are in charge of carrying out the services of government.

Public choice theory:

School of thought emphasizing that the government may not act to maximize the well-being of its citizens.

Corruption:

The abuse of power by government officials in order to maximize their own personal wealth or that of their associates.

Marginal willingness to pay:

The amount that individuals are willing to pay for the next unit of a good.

lobbying

The expending of resources by certain individuals or groups in an attempt to influence a politician. suffers from free rider problem

Government failure

The inability or unwillingness of the government to act primarily in the interest of its citizens.

Assumptions of the Median Voter Model: Full Information

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

Single-dimensional voting

The median voter model assumes that voters are basing their votes on a single issue.

No selective voting

The median voter theory assumes that all people affected by public goods vote.

No money

The median voter theory ignores the role of money as a tool of influence in elections.

Voter initiative:

The placement of legislation on the ballot by citizens.

Majority voting:

The typical mechanism used to aggregate individual votes into a social decision, whereby individual policy options are put to a vote and the option that receives the majority of votes is chosen.

Median voter:

The voter whose tastes are in the middle of the set of voters.

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.

A large literature finds that when state-owned companies are privatized, efficiency improves dramatically, and a smaller company is required to produce the same level of output

a large literature

to consistently aggregate preferences majority voting must satisfy three goals

dominace transitivy independence of irrelevant alternatives