Political Economy - Main Concpets Simple

Arrow’s Impossibility Theorem

When there are 3 or more options, no voting system can produce a perfectly fair collective decision. Any voting rule must violate at least one fairness condition.

Median Voter Theorem

If voters have single-peaked preferences, the policy preferred by the median voter wins under majority voting. Political parties therefore tend to move toward the center to capture the median voter.

Lindahl Pricing

A way to finance public goods where each person pays a price equal to their willingness to pay. In equilibrium the sum of individual prices equals the cost of the public good.

Logrolling & Vote Trading

Politicians trade votes to support each other’s policies. This helps minority projects pass but can lead to inefficient spending and pork-barrel politics.

Opportunistic Political Business Cycle

Governments stimulate the economy before elections to improve re-election chances. After elections the economy may slow or inflation rises as the temporary policies unwind.

Partisan Political Business Cycle

Different political parties prioritize different macroeconomic outcomes. Left-leaning parties focus more on employment, while right-leaning parties focus more on controlling inflation.

Meltzer–Richard Model

In democracies the median voter chooses the level of redistribution. If median income < average income, the median voter supports higher taxes and transfers.

Second-Best and Gender Quotas

Discrimination prevents some talented women from entering politics. Gender quotas add another distortion but may improve outcomes by bringing more high-ability women into office.

Solow Steady State & Diminishing Returns

In the Solow model, each additional unit of capital increases output less than the previous one. The economy reaches a steady state where capital per worker stops growing unless technology improves.

Time Inconsistency & Inflation Bias

Governments promise low inflation but later have incentives to create surprise inflation to boost employment. Rational expectations mean inflation rises without improving employment.

War of Attrition

When economic adjustment is needed but groups disagree over who bears the cost. Each group delays action, hoping others concede, which worsens the crisis.

Cabinet Government vs Consensus Democracy

Cabinet systems concentrate power and allow fast policy adjustments. Consensus democracies require broad agreement, which slows decisions but prevents overly rapid policy change