Lecture 6 - Lecture 6 Political Economy Political Economy...

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Lecture 6 Political Economy
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Political Economy Why important? Economists don’t determine public policies Decision structure differs across countries Single ruler Elected officials Direct vote of citizens Can these mechanisms deliver the optimal interventions suggested by theory?
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Unanimous Consent Model of government that is able to optimally determine the level of public goods Use Lindahl pricing to form social benefit curve Individuals honestly reveal their willingness to pay Government charges them that amount to finance the public good Total SMB can be compared to the SMC for the next unit to determine whether or not next unit should be produced Efficient production of public goods through use of benefit taxation Unrealistic model
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Constructing Lindahl Pricing
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Problems with Lindahl Pricing Preference revelation problem Incentive to lie about willingness to pay Free rider problem Preference knowledge problem Individuals may not know their valuation Preference aggregation problem Realistically, can’t survey and add every citizens’ willingness to pay
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