Political Economy: Government Decisions & Public Policy

Understanding Political Economy

Political economy applies economic principles to the analysis of political decision-making.

Public Goods & Direct Democracy

Economists have studied several methods for choosing levels of public goods in a direct democracy.

Lindahl Pricing & Preference Revelation

Lindahl pricing results in a unanimous decision to provide an efficient quantity of public goods, but relies on honest revelation of preferences.

Majority Voting Challenges

Majority voting may lead to inconsistent decisions regarding public goods if some people's preferences are not single-peaked.

Logrolling: Trading Votes

Logrolling allows voters to express the intensity of their preferences by trading votes. However, minority gains may come at the expense of greater general losses.

Decision-Making Limitations: Arrow's Theorem

Arrow's Impossibility Theorem states that, in general, it is impossible to find a decision-making rule that simultaneously satisfies a number of apparently reasonable criteria. The implication is that democracies are inherently prone to make inconsistent decisions.

Government Behavior in Representative Democracies

Explanations of government behavior in a representative democracy require studying the interaction of elected officials, public employees, and special-interest groups.

Elected Officials & the Median Voter

Under restrictive assumptions, the actions of elected officials mimic the wishes of the median voter.

Public Employees & Bureaucratic Influence

Public employees have an important impact on the development and implementation of economic policy. One theory predicts that bureaucrats attempt to maximize the size of their agencies' budgets, resulting in oversupply of the service.

Special-Interest Groups & Rent-Seeking

Rent-seeking private citizens form groups to influence government activity. Special interests can form on the basis of income source, income size, industry, region, or personal characteristics.

Analyzing Government Growth

The growth of government has been rapid by any measure.

Factors Driving Public Sector Expansion

Explanations of this phenomenon include:

• Citizens simply want a larger government.
• The public sector must expand to absorb private excess production.
• Random events (such as wars) increase the growth of government, while inertia prevents a return to previous levels.
• Unrealistic expectations have resulted in increasing demands that ignore the opportunity costs of public programs.
• Certain groups use the government to redistribute income to themselves.

Strategies to Control Government Growth

Proposals to control the growth in government include:

• Encouraging private sector competition.
• Reforming the budget process.
• Constitutional amendments.