Public Policy and Political Economy Mid term

Externalities

Occur when one persons actions affect another persons well-being and the relevant costs and benefits are not affected in the market prices.

Public good externalities

When one individual consumption of such a good leads to no subtraction of another persons consumption of that good

Injustice

Do we have the right to clean air? if the answer is yes then we have a duty to safegaurd the clean air therefore producing emissions is an injustice

Progressive taxation( from Utilitarianism to egalitarianism)

Utilitarianism: policies maximise the aggregate utility in society since rich people have lower marginal utility from income, taxation should progress

egalitarianism: equal outcomes and opportunities

Pigovian taxes

Imposed when produce negative externality

Utility function

A mathematical function that translates consumption into utility U=u(X1,X2,X3,..) where X1,X2,X3.. are the quantity of goods 1,2,3 consumed by the individual

:individual utility increases with the level of consumption of each good

Utilitarian Social welfare function

Socities goal is to maximise the sum of individuals utility SWF=U1+U2+..UN 

if marginal utility of money decreases with income(satiation) utilitarian criterion values redistribution from the rich to the poor

Example: Taking £1 for a rich person decreases his utility by a small amount, giving the £1 to a poor person increases his utility by a large amount ⇒ Transfers from rich to poor increase total utility

Rawlsian social welfare function

Rawls (1971) proposes that socities goal should be to maximise the well being of its worst off member SWF=min(U1,U2,…UN

since social welfare is determined by the minimum utility in society, social welfare is maximised by maximising the welfare of the worst off person of society

Rawlsian criterion is even more redistributive than utilitarian criterion as society wants to extract as much tax revenue as possible from the rich and middle classes to make transfers to the poor as large as possible

The median voter theorem

• Median Voter: The individual whose preferences lie at the midpoint of the political spectrum, dividing the electorate into two equal halves.

• Single-Peaked Preferences: Assumes each voter has one most-preferred option and preferences decline as options move away from this ideal point.

• Majority Rule: The theorem operates under the assumption that decisions are made by majority vote.

• Unidimensional Policy Space: Voter preferences are distributed along a single axis (e.g., left–right political spectrum).

• Candidate Convergence: In a two-candidate race, both candidates tend to adopt positions close to the median voter to maximize votes

The median voter theorem assumptions

• each voter has one preferred policy position, preference declines as policies move away from that point

• assumes a simply majority rule

• Voters vote sincerely (not strategically)

• Only two candidates or parties compete.

• The policy space is continuous and one-dimensional.

Market failure

Economic situation that occurs when there is an inefficient distribution of goods and services in the free market.

can occur for variety of reasons such as market dominance and negative externalities.

Asymmetric information

A situation where one party in a transaction has more or better information than the other

• Give rise to market imperfection such as moral hazard - When one party takes on more risk because they don't bear the full consequences, often due to hidden action

Incomplete markets

A market where people can't fully protect themselves against future risks because some financial tools or contracts are missing.

Regulation

Rules or standards set by governments or regulatory bodies to guide or control behavior in markets and society

Regulation capture

result or process by which regulation, in law or application, is consistently or repeatedly moved away from the public interest and towards interest of regulate industry, by the intent and action of the industry itself

Strong capture

violates public interest to such an extent that the public is better of

a) no regulation of the activity in question as the benefits of regulation are outweighed by the costs of capture

b) comprehensive replacement of the policy and agency in question

Weak capture

Occurs when special interests influence compromises the capacity of regulation to enhance public interest, but public is still being served by regulation, it is relative to baselines of no regulation

Corrosive capture

Occurs if organised firms render regulation less robust than intended in legislation or what public interest would recommend.

•The consequence of corrosive capture could potentially take the form of reduced entry but would far more commonly be observed in the reduction of costly rules and enforcement actions that cut into profits- regulators start favoring businesses too much. Instead of letting new competitors enter the market, they often weaken rules or stop enforcing them—especially if those rules would reduce company profit

Revolving door

Migration of individuals between governments and business

Interest group

Organization which have some autonomy from government and political parties that try to influence public policy

Exclusive groups

trying to provide themselves with a rival public good and therefore are better off when fewer beneficiaries of the public good belong to the group. eg industry lobbies Exclusive groups align with elite theory, where power is concentrated among a few.

Inclusive groups

welcome new members because new members do not detract from the ability of existing members to consume the public good and they can help defray the costs of providing it. Thus, inclusive groups are providing a pure public good

inclusive groups support pluralist democracy by amplifying diverse voices..

Sectional group

Goal is to fight for interests of specific segment of society or industry. the primary goal is to promote the material or professional interests of their members. Membership is limited to those who belong to certain industry.

Example- Trade union who want higher wages for members

Cause groups

Fight for benefit or principal rather than material interest, interest are public(to improve society), open membership anyone who supports can join

Example- Human rights group such as Amnesty international

Rival and non-rival goods

A pure public good is non-rival and non-excludable one persons consumption of that good does not attract from the ability of others to consume that good. Eg. a park or a well

Logic of collective action

• Pursuit of a common interest by a group, where outcome is shared by all members whether or whether not they contribute to the effort

• •If the members of some group have a common interest or objective, and if they would all be better off if that objective were achieved, it has been thought to follow logically that the individuals in that group would, if they were rational and self-interested, act to achieve that objective.

• explains formation of trade unions

• But it is not in fact true that the idea that groups will act in their self-interest follows logically from the premise of rational and self-interested behavior. It does not follow, because all of the individuals in a group would gain if they achieved their group objective, that they would act to achieve that objective, even if they were all rational and self-interested.-

• Just because people in a group are rational and care about their own interests doesn’t mean they’ll work together to reach a shared goal. Even if everyone would benefit, they might not act—because each person might hope others will do the work, or worry their effort won’t matter

Large goals

Often fail to act collectivley as everyone gains a little so no one feels strongly motivated and free-riding indivuduals can enjoy benefits without contribtuing, unlike non-collective goods.

• the loss of ones dues payer will not noticeably increase the burden for any other one dues payer, and so a rational person would not believe that if he were to withdraw from an organization he would drive others to do so.This phenomenon is known as the "free-rider problem," where individuals benefit from resources or services without paying for them, leading to under-provision of public goods.

• •Those who do not purchase of pay for any of the public or collective good cannot be excluded or kept from sharing in the consumption of the good, as they can where noncollective goods are concerned.

• The very fact that a goal or purpose is common to a group means that no one in the group is excluded from the benefit or satisfaction brought about by its achievement.

Small group

May be some voluntary action in support of a common goal of individuals in group. Olsen argues that small groups are more likely to succeed in collective action as benefits are concentrated(members gain directly and significantly), costs of organising are lower and monitoring and sanctioning free riders is easier

Collective action problem

also known as free riding.There are compelling reasons to doubt whether individuals will take collective action to achieve their common interests

• difficulty in providing all members with public goods

• occurs when individuals would all benefit from working together but each has an incentive to not participate, hoping others will do the work whilst they still enjoy the benefits this will lead to failure to achieve goal.

• Example: Public goods such as clean air are non-excludable and rivalrous so people may not contribute(eg through taxes) because they cant be excludes from enjoying the benefit

What is Structural power

power that comes from the organisation of a political system - about how institutions and political systems are set up in ways which are advantages to some actors and disadvantageous to others

What is Structural power question

Is it organised pressure groups or the structural power of financial capital that explains financial markets' policy in industrialised democracies?

What is Structural power main argument

Political influence and power of finance not through combat, but through impersonal structures unfolding over time.

What is Structural power argument 1

•Decline of organised groups since 1970s

•Little evidence of a direct relationship between money and politics

•Government policies are closer to the preferences of top earners than of pressure groups (Gillens 2012).

•In Europe trade unions are stronger & coordinate with business

•Party finance is highly regulated

What is Structural power argument 2

•Puzzle 2: Parties on the center-left rather than the right advocated financial liberalisation

Office seeking parties

Primarly motivated by the desire to gain political office, rather than to implement policy.

• Riker(1962) more likely to form minimal winning coalition's just large enough to gain majority

Policy seeking parties

Motivated by desire to influence or implement specific policy outcomes for specific interest groups

• Riker(1962) more likely to form minimal winning coalition's just large enough to gain majority

What factors result in the median voter theorem breaking down?

• Party ideology

• Voter polarization

• sincre voting

• strategic voting

• imperfect knowledge

-Sincere voting

-Strategic voting

-imperfect knowledge

Party ideology

Refers to a set of belief, values and principles.

• create ideologies to attract votes. Does not mean that they cannot change ideology once hey are on the market however not radically.

Voter polarization

occurs when an electorate's attitudes towards political issues, policies, divided along party lines

Sincere voting

Casting a vote for the candidate or party that best reflects your true preferences, regardless of their chances of winning.

Strategic voting

Voting for a candidate or party that isn't your top choice, but has a better chance of winning or influencing the outcome in a way you prefer.

Imperfect knowledge Means

• Parties do not know what citizens want

• citizens do not wlays know what the gov. or its opposition has done, is doing or should be doing

• getting info to stop being ignorant is costly and time consuming