Download - 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
type 1 type 2 type 3
Percent of the voters 35% 45% 20%
first choice south central east
second choice central east south
third choice east south central
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
type 1 type 2 type 3
Percent of the voters 35% 45% 20%
first choice south central east
second choice central east south
third choice east south central
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
type 1 type 2 type 3
Percent of the voters 35% 45% 20%
first choice south central east
second choice central east south
third choice east south central
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
25% of the voters want to increase spending on education
by around $1500 per student
15% of the voters want to increase spending on education
by around $1000 per student
35% of the voters want to increase spending on educationby around $500 per student
10% of the voters want to increase spending on education
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.