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The Role of Government in the American Economy

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					                             CHAPTER



                                8
     Public Sector Demand


PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe
        The Median Voter Model
 Concludes that a majority rule voting
  system will select the outcome preferred
  by the median voter
 Important assumptions:
      Voters can rank alternatives along a one-
       dimensional continuum
      Voters have single-peaked preferences




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-2
  The Median Voter Model:
  Committee & Referendum




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe                               8-3
       The Median Voter in a
     Representative Democracy
 Voters generally do not directly vote on
  issues in a representative democracy
 Voters choose the representative that has
  views that are closest to their own




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-4
       The Median Voter in a
     Representative Democracy
 Two representative model
 Winning candidate needs to get the
  median voter to win
 Political competition results in both
  representatives targeting the median
  voter



    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-5
   The Median Voter in a
 Representative Democracy




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe                               8-6
     The Decisive Median Voter
 As long as preference assumptions hold,
  model can be extended to any number of
  voters
 Can be represented in a density function
  with positions from left to right
 More voters near the median voter




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-7
 The Decisive Median Voter




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe                               8-8
     Application: Extreme
Candidates Cannot Win Election




 PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                            Randall Holcombe                               8-9
   Application: Third Parties
        Cannot Persist




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe                               8-10
             The Cyclical Majority
 If preference assumptions are violated,
  median voter’s preferred outcome might
  not be selected by majority rule
 Could produce a cyclical majority
      Nosingle outcome can defeat all others by
       majority rule




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-11
  Violation of Single Peaked
         Preferences




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe                               8-12
               Cycles and Political
                   Institutions
 If preferences are cyclical, political
  institutions can effect elections
 Example: Ford vs. Carter

 Primary produces a unique winner, even
  with cyclical preferences
 Political institutions help produce stable
  outcomes

    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-13
     Information and Incentives
   The political marketplace
      Most     voters do not have direct input
   Voters are rationally ignorant
      Individual       vote is unlikely to affect the
       outcome
      Voters have little incentive to become
       informed


    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-14
                  Special Interests
 Special interests have an incentive to
  become informed because of
  concentrated benefits
 Example: dairy farmers

 Politicians have an incentive to favor
  special interests over the public interest



    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-15
     Information and Incentives
   Special interests and rational ignorance
    combine against the public interest skew
    median voter demand
      Skew  median voter demand toward special
       interest
      Tendency to support short-sighted policies




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-16
      Public Sector Demand in
     Theory and the Real World
 Special interests and rational ignorance
  lead to government failure
 Government failure leads to misallocation
  of resources
 Median voter model, like perfect
  competition, helps provide insight into
  the ideal system

    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-17
    Economic Efficiency and the
          Median Voter
 Even if the median voter model holds,
  majority rule voting is not likely to
  allocate resources efficiently
 The median voter’s equilibrium is
  efficient when the median voter’s share
  of total demand equals median voter’s
  share of total cost


    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe                               8-18
Economic Efficiency and the
      Median Voter




PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                           Randall Holcombe                               8-19
                          Discussion
 Cyclical majorities could arise in any kind
  of democratic election. How likely do you
  think they are in practice?
 How does the incentive structure in
  politics provide incentives for even the
  most public-spirited representatives to
  pursue shortsighted public policies?


    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe
                          Discussion
   What condition must be satisfied so that
    median voter`s most preferred level of
    output will be economically efficient?
    Explain why this condition makes sense?
    Can you apply this into the real world?




    PUBLIC SECTOR ECONOMICS: The Role of Government in the American Economy
                               Randall Holcombe

				
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