Class IX - Political Economy

Public Finance and Public Policy Jonathan
CopyrightGruber
© 2010 Fourth
Worth Edition
Publishers
Copyright © 2012 Worth Publishers 1 of 49
Political Economy 9
9.1. Keputusan bulat dalam penyediaan barang publik;
9.2. Mekanisme untuk mengumpulkan Preferensi
individu;
9.3. Demokrasi Perwakilan
9.4 Public Choice Theory: The Foundations of
Government Failure
9.5 Conclusion
Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright © 2012 Worth Publishers 2 of 49
CHAPTE R 9 ■ PO LITI CAL EC O NO MY
9
Political Economy
Why do governments do what they do?

• Different ways of organizing government produce
different results.
• Kondisi Ideal : Pemerintah menganalisa preferensi dan
menetapkan pilihan berdasarkan preferensi tsb.
• Direct democracy: Voters secara langsung
menyumbangkan suaranya untuk mendukung atau
menolak suatu public projects.
• Representative democracy: Voters memilih wakil
untuk kemudian memberikan keputusan atas public
project.
9.1
Keputusan bulat dalam level barang publik
Kondisi Ideal untuk public goods:

• Lindahl pricing: pendekatan untuk pembiayaan barang
publik di mana individu secara jujur mengungkapkan
kerelaannya untuk membayar (dan kemudian dipajaki
oleh pemerintah) untuk membiayai barang publik
• Semua berdasarkan marginal willingness to pay.
• Marginal willingness to pay: Nilai kerelaan individu
untuk membayar setiap unit tambahan barang.
9.1
Lindahl Pricing
Prosedur Lindahl Pricing, antara lain:

1. Pemerintah mengumumkan besaran harga pajak atas
public good.
2. Setiap orang menyatakan kemampuan & kemauannya
untuk membayar public good pada harga pajak
tertentu.
3. Hal ini diulangi terus menerus,untuk membentuk
schedule marginal willingness to pay bagi setiap
individual.
9.1
Lindahl Pricing
efficient provision ditunjukkan pada titik di mana Total

marginal willingness to pay = MC.
4. Jumlahkan setiap willingnesses to pay pada setiap
kuantitas public good yang disediakan provided.
5. Temukan titik di mana Total marginal willingness to
pay = MC.
6. Memungut setiap individu berdasarkan kerelaan
masing-masing individu.
9.1
Lindahl Pricing: Graphical Representation
Ava’s marginal
willingness to pay
$1.00
0.75
0.50
0.25 Demand, DA
0 25 50 75 100 Fireworks
Jack’s marginal
willingness to pay
$3.00
2.25
1.50
0.75
DJ
0 25 50 75 100 Fireworks
Ava & Jack’s
willingness to pay
$4.00
3.00
2.00
1.00 Marginal Cost, MC

DA+J
0 25 50 75 100 Fireworks
9.1
Lindahl Pricing: Why It Works
Under Lindahl pricing, the government produces the

efficient amount of the public good.
• This is because MC = Total marginal willingness to pay.
• Each person’s price is equal to their own marginal
willingness to pay, so this is an equilibrium.
• Lindahl pricing also exemplifies benefit taxation.
• Benefit taxation: Taxation in which individuals are
taxed for a public good according to their valuation of
the benefit they receive from that good.
9.1
Problems with Lindahl Pricing
Lindahl pricing faces several problems that keep it from

being used in practice:
1. Preference revelation problem: Individuals have an
incentive to lie about their Willingness to pay (WTP),
to lower their price.
2. Preference knowledge problem: Individuals may not
know their WTP.
3. Preference aggregation problem: It is not obvious
how to aggregate individual preferences into a social
welfare function.
9.2
Mekanisme untuk mengumpulkan Preferensi
individu: Direct Democracy
• Direct democracy uses referenda and voter initiatives.

• Referendum: Cara pemungutan suara oleh
pemerintah bagi warga masyarakat atas
rancangan/amandemen undang-undang atau
kebijakan publik yang sudah disampaikan oleh
pemerintah (state legislature).
• Voter initiative: Usulan perubahan aturan dari inisiatif
masyarakat jika mereka sanggup mengumpulkan
petisi.
9.2
Majority Voting: When It Works
• Lindahl pricing requires unanimous consent to

implement the public good.
• Most governments only use majority voting.
o Majority voting: mekanisme umum yg digunakan
untuk mengumpulkan pilihan individu menjadi
pilihan sosial, berdasarkan pilihan yang mendapat
suara paling banyak (mayoritas)
9.2
• To consistently aggregate preferences, majority voting

must satisfy three goals:
1. Dominance
2. Transitivity
3. Independence of irrelevant alternatives
• So majority voting can consistently aggregate
individual preferences if and only if preferences are
restricted to take a certain form.
9.2
• There are three types of voters in a town: parents,

elders, and young couples without children.
• They have different preferences over the level of
school spending (high, medium, or low).
Parents Elders Young Couples

(33.3%) (33.3%) (33.3%)
First choice H L M
Second choice M M L
Third choice L H H
9.2
How to vote among the three options?

• The town could proceed as follows:
o First, vote on funding level H versus funding level L.
o Then, vote on H versus M.
o Then, vote on L versus M.
• M will win each head to vote, and win.
• M would win for any order of voting, so majority
voting is consistent.
9.2
Majority Voting: When It Doesn’t Work
• Cycling: When majority voting does not deliver a

consistent aggregation of individual preferences.
Public Private
school school Young
parents parents Couples
(33.3%) (33.3%) (33.3%)
First choice H L M
Second choice M H L
Third choice L M H
9.2
Arrow’s Impossibility Theorem
• Majority-runoff voting didn’t work, but maybe

something else would.
o We could let everyone vote on their first choice.
o We could do weighted voting by assigning.
• In fact, there is no good way to consistently aggregate
these preferences.
• 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.
9.2
Restricting Preferences to Solve the Impossibility
Problem
One way to avoid the impossibility problem is to restrict

preferences.
• The problem with the private school parents is that
their preferences are not single peaked.
• 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.
9.2
Single-Peaked versus Non-Single-Peaked
Preferences
9.2
Median Voter Theory
With single peaked preferences, voting works well.

• Median Voter Theorem: Majority voting will yield the
outcome preferred by the median voter if preferences
are single-peaked.
• Median voter: The voter whose tastes are in the
middle of the set of voters.
• The government need find only the one voter whose
preferences for the public good are right in the middle
of the distribution of social preferences and
implement the level of public goods preferred by that
voter.
9.2
Potential Inefficiency of the Median Voter Theorem
Majority voting and the median voter theorem outcome

are potentially inefficient.
• Suppose 51% of voters prefer a project that benefits
them $10 on net and 49% oppose it with a net benefit
of −$20.
• Under majority voting, the government undertakes
the project and, on average, surplus falls by almost $5.
• Majority voting does not recognize intensity of
preferences.
9.3
Representative Democracy
- Vote-Maximizing Politicians Represent the Median Voter

- The median voter model may apply to representative
democracies.
• Key assumption:
• All politicians care about is maximizing the number
of votes they get.
• Politicians strategically position themselves to get
the most votes.
• End up enacting the median voters’ preferences.
9.3
Vote-Maximizing Politicians Represent the Median
Voter
Voters for Barack Voters for Mitt

Defense
(a) spending
0% B1 25% M1 50%
Defense
(b) spending
0% B2 25% M1 50%
Defense
(c) spending
0% B2 25% M2 50%

Defense
(d) spending
0% B3 = M3 = 25% 50%
9.3
Assumptions of the Median Voter Model:
Single-Dimensional Voting
The median voter model relies on several assumptions.

• Single-dimensional voting
o The median voter model assumes that voters are
basing their votes on a single issue.
o Representatives are elected on a bundle of issues.
o Different people have may lie at different points of
the voting spectrum on different issues, so
appealing to one end of the spectrum or another
on some issues may be vote-maximizing.
9.3
Assumptions of the Median Voter Model:
Only Two Candidates
• Only two candidates

o The model assumes only two candidates
o No equilibrium in the model with three or more
candidates: There is always an incentive to move in
response to your opponents’ positions.
o In many nations, the possibility of three or more
valid candidates for office is a real one.
9.3
Assumptions of the Median Voter Model: No
Ideology or Influence
• No ideology or influence
o The median voter theory assumes that politicians
care only about maximizing votes.
o Ideological convictions could lead politicians to
position themselves away from the center of the
spectrum and the median voter.
9.3
Assumptions of the Median Voter Model: No
Ideology or Influence
• No selective voting
o The median voter theory assumes that all people
affected by public goods vote.
o In fact, only a fraction of citizens vote in the United
States.
9.3
Assumptions of the Median Voter Model: No Money
• No money
o The median voter theory ignores the role of money as
a tool of influence in elections.
o 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.
9.3
Assumptions of the Median Voter Model: Full
Information
• Full information
o 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
o All three of these assumptions are unrealistic.
9.3
Lobbying
Problems with the median voter model make lobbying

likely.
• Lobbying: The expending of resources by certain
individuals or groups in an attempt to influence a
politician.
• Lobbying can help convey intensity of preferences.
• Lobbying can help inform politicians and the
electorate about important issues.
9.3
Lobbying and the Free Rider Problem
• Lobbying suffers from the free rider problem:

o Many bills benefit a small number of people a
great deal and harm a huge number of people by a
small amount.
o The smaller groups are much more able to
organize and so can raise money to lobby more
effectively.
o Thus, lobbying helps pass inefficient bills.
9.3
APPLICATION: Farm Policy in the United States
• The farming sector receives $23 billion in support from

the federal government each year in two forms:
o Direct subsidy payments ($11 billion)
o Price supports ($12 billion)
• The average farmer receives more than $10,000/year
in support.
• The average American pays more than $200/year for
this.
9.3
APPLICATION: Farm Policy in the United States
Why do American families pay such large costs to support

the farm sector?
• One answer: This helps preserve the “family farm.”
o But most support goes to large farms, and other
countries have farming without subsidies.
• More likely answer: free rider problems.
o Farmers have a strong incentive to support a farm
lobby ($10,000/year).
o Non-farmers have little reason to oppose.
9.4
Public Choice Theory: The Foundations of
Government Failure
The failure of the Median voter model indicates that the

government may not enact citizens’ preferences.
• Government failure: The inability or unwillingness of
the government to act primarily in the interest of its
citizens.
• Public choice theory: School of thought emphasizing
that the government may not act to maximize the well-
being of its citizens.
9.4
Size-Maximizing Bureaucracy
• Theories of government failure began by examining

bureaucracies.
o 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.
• 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.
9.4
Private versus Public Provision
If government can fail, is it more efficient to provide by

the public or private sector?
• For purely private goods and services, such as steel,
telecommunications, or banking, it seems abundantly
clear that private production is more efficient.
• 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.
9.4
Problems with Privatization
Privatization is not a panacea.

• 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.
• 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.
9.4
APPLICATION: Contracting Out with Non-
Competitive Bidding
Contracting out often takes place without a competitive

bidding process.
• Since early 2000s, Wackenhutt Corporation has been
the primary security contractor at U.S. weapons
plants.
o Wackenhutt cheated during safety tests, so the
inspector general reported the results were
“tainted and unreliable.”
o Hired by the Nuclear Energy Institute in 2004.
9.4
Competitive Bidding
• In 2003 and 2004, DHB industries won hundreds of

millions of dollars of contracts to supply body armor to
troops in Iraq.
o But in 2002, DHB had to return 6,400 defective
vests to the NYPD.
o In 2003, workers accused DHB of sloppy quality
control.
o 23,000 vests were recalled from Iraq.
9.4
Competitive Bidding
• Since 2005, the Pentagon awarded more than $50

million of contracts to Applied Energetics.
o Wanted solutions to combat improvised explosive
devices.
o Applied Energetics continued to receive funding
after failed test.
o Rival company Xtreme Alternative Defense System,
with successful anti-IED technology, has received
only $1.5 million.
9.4
Leviathan Theory
• Leviathan theory:
o Government attempts to grow as large as possible.
o Voters cannot trust the government to spend their
tax dollars efficiently.
o Must design ways to combat government greed.
• This can explain the many rules in place in the United
States and elsewhere that explicitly tie the
government’s hands in terms of taxes and spending.
9.4
Corruption
Corruption is an important form of government failure.

• Corruption: The abuse of power by government
officials in order to maximize their own personal
wealth or that of their associates.
• May be constrained by electoral accountability, the
ability of voters to throw out corrupt regimes.
• 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.
9.4
APPLICATION: Government Corruption
• In 2003, former Illinois governor George Ryan indicted

for corruption.
o Sold state contracts in exchange for cash, gifts,
loans and trips for his family.
• Replaced by Rod Blagojevich, who campaigned as a
reformer.
• In 2008, Blagojevich was arrested on federal
corruption charges.
o Tried to sell Obama’s Senate seat and pressured
Tribute Company to fire critical journalists.
9.4
The Implications of Government Failure
• Do these failures have important implications?

• Or can citizens use policies such as property tax
limitations to limit harms imposed by government
structure?
• Some evidence suggests that government failures can
have long-lasting negative impacts on economic
growth.
9.5
Conclusion
• Secara teori, pemerintah dapat membiayai barang publik dengan

menanyakan setiap individu untuk berkontribusi sesuai dengan
willingness to pay (Lindahl Pricing)
• Dalam kenyataannya, terdapat permasalahan terkait preference
revelation, preference knowledge, dan preference aggregation
• Satu cara untuk melakukan agregasi preferensi adalah melalui direct
democracy. Mekanisme ini akan efektif hanya jika preferensi pemilih
dibatasi pada bentuk tertentu (single peaked preference)
• Cara lainnya adalah Representative Democracy, di mana preferensi
individu memilih wakil untuk kemudian memutuskan pilihan kebijakan.
Mekanisme ini didasari oleh Median Voter Model
• Terakhir, Public Choice Theory menunjukkan dasar kegagalan pemerintah
(yg gagal memenuhi ekspektasi untuk mencapai efisiensi sosial)

Class IX - Political Economy

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Class IX - Political Economy

Diunggah oleh

Hak Cipta:

Format Tersedia

Public Finance and Public Policy Jonathan

Why do governments do what they do?

Kondisi Ideal untuk public goods:

Prosedur Lindahl Pricing, antara lain:

efficient provision ditunjukkan pada titik di mana Total

1.00 Marginal Cost, MC

Under Lindahl pricing, the government produces the

Lindahl pricing faces several problems that keep it from

• Direct democracy uses referenda and voter initiatives.

• Lindahl pricing requires unanimous consent to

• To consistently aggregate preferences, majority voting

• There are three types of voters in a town: parents,

Parents Elders Young Couples

How to vote among the three options?

• Cycling: When majority voting does not deliver a

• Majority-runoff voting didn’t work, but maybe

One way to avoid the impossibility problem is to restrict

With single peaked preferences, voting works well.

Majority voting and the median voter theorem outcome

- Vote-Maximizing Politicians Represent the Median Voter

Voters for Barack Voters for Mitt

Voters for Barack Voters for Mitt

The median voter model relies on several assumptions.

• Only two candidates

Problems with the median voter model make lobbying

• Lobbying suffers from the free rider problem:

• The farming sector receives $23 billion in support from

Why do American families pay such large costs to support

The failure of the Median voter model indicates that the

• Theories of government failure began by examining

If government can fail, is it more efficient to provide by

Privatization is not a panacea.

Contracting out often takes place without a competitive

• In 2003 and 2004, DHB industries won hundreds of

• Since 2005, the Pentagon awarded more than $50

Corruption is an important form of government failure.

• In 2003, former Illinois governor George Ryan indicted

• Do these failures have important implications?

• Secara teori, pemerintah dapat membiayai barang publik dengan

Anda mungkin juga menyukai