Politics of economics

What is positive economics?

Economics that is based on measurable and testable evidence

What is normative decision making?

Opinion based decision making and depends on value judgements

Whats the economic theory behind free trade and specialization?

Countries can mutually benefit from international trade by specialzing in the production of goods in which they have a comparative advantage in.

Robert peel repealing corn laws

Whats the economic theory behind Keynesian economics

Governmnent intervention(increased public spending and cutting down on taxes) can help stimulate demand and help the economy during a recession.

Franklin D Roosevelt and his new deal

Whats the economic theory behind tax cuts and supply side economics?

Cutting taxes encourages individuals/business to work harder/invest more.

What is an opportunity cost?

The value of the next best alternative forgone.

Who was Alexander Hamilton

• One of the founding fathers of America

• Believed in industrialization and a strong central government

• Creation of first bank of America(national bank)

• The national bank was root of the federal reserve

What is federalism?

A system of government that divides power between central authority and regional governments

What two concepts does federalism combine?

Division of power: Between Central and state governments

Dual sovereignty: both levels of government have distinct areas of authority

What is centralization in federalism?

Concentration of power at the national level

What is decentralization in federalism?

power is distributed across state and local governments

What are the pros of centralization

• Better management of externality

• Clear accountability and responsibility

• Uniform protection of rights and legal standards

• Economies of scale in public provision

• Policy coherence in national and international affairs

What is meant by a central government being better at clear accountability and responsibility

Centralization makes it easier for citizens to identify who is
responsible for policy successes or failures, reducing blame-shifting
between federal and state governments.

What is meant by a central government being better at uniform protection of rights and legal standards

A strong centre ensures fundamental rights and legal protections are applied equally across all states, preventing regional governments from undermining them.

What is meant by a central government being better at economies of scale in the provision of public goods?

National-level provision of defence, infrastructure, or procurement
allows bulk purchasing and standardized systems, reducing per-unit
costs.

What is meant by a central government being better at policy coherence in national and international affairs?

Centralization allows the country to speak with one voice in diplomacy, trade negotiations, and treaty obligations, avoiding conflicting state-level actions.

What is meant by a central government being better at managing externalities.

• Negative externalities would be overproduced if the government dosen’t step in because the free market produces at a point greater than what is socially efficient because MSC>MPC

• Positive externalities would be underproduced if the government dosen’t step in because the free market produces at a point lesser than what is socially efficient because MSB>MPB

Negative externalities graph

Positive externalities graph

What are the 3 cons of a centralized government

• Reduced policy responsiveness to local needs

• over concentration of power and weaker checks

• administrative overload and slower decision making

What is meant by reduced policy responsiveness to local needs?

Centralized decision-making can ignore regional economic, cultural, or social differences, leading to one-size-fits-all policies that work
poorly at the local level.

What is meant by over concentration of power and weaker checks

Shifting authority to the centre can erode state autonomy, increasing the risk of abuse of power and weakening federal checks and balances.

what is meant by administrative overload and slower decision making

When too many responsibilities are handled by the central government, bureaucracy expands and policy implementation can become slower and less effective.

What are the pros of decentralization

• Greater political participation and democratic agreement

• improved government accountability through competition

What is meant by greater political and democratic agreement

Bringing decision-making closer to citizens increases voter
participation, civic involvement, and government responsiveness,
strengthening democratic accountability.

What is meant by improved government accountability through competition?

When sub national governments control key policies, citizens can compare performance across regions and “vote with their feet,” pressuring governments to govern more effectively.

What are the cons of decentralization

• Regional inequality and uneven public services

• Risk of local elite capture and corruption

What is meant by regional inequality and uneven public services

Wealthier regions can provide better infrastructure, education, and
healthcare than poorer ones, widening economic and social disparities across the federation.

What is meant by risk of local elite capture and corruption?

When services are provided separately by sub-national governments, costs can rise due to duplication of administration and smaller-scale procurement.