Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Representative DemocracyRepresentative Democracy: PoliticiansSlide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers1 of 371 of 37Political Economy9.5 Conclusion9.3 Representative Democracy9.2 Mechanisms forAggregating IndividualPreferences9.1 Unanimous Consent onPublic Goods Levels•In the case of direct democracy, voters directly cast ballots in favor of or in opposition to particular public projects.•The second case is that of representative democracy, whereby voters elect representatives, who in turn make decisions on public projects.•Government failure is the inability or unwillingness of governments to appropriately address market failures.Chapter 99.4 Public Choice Theory:The Foundations ofGovernment FailurePublic Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers2 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M YUnanimous Consent on Public Goods Levels9.1Lindahl pricing An approach to financing public goods in which individuals honestly reveal their willingness to pay and the government charges them that amount to finance the public good.Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers3 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M Y9.1Unanimous Consent on Public Goods LevelsLindahl Pricingmarginal willingness to pay The amount that individuals are willing to pay for the next unit of a good.Lindahl’s procedure operates as follows:1. The government announces a set of tax prices for the public good.2. Each individual announces how much of the public good he or she wants at those tax prices.3. The government repeats these steps to construct a marginal willingness to pay schedule for each individual.4. The government adds up individual willingnesses to pay at each quantity of public good provided.5. The government relates this overall demand curve to the marginal cost curve.6. The government then finances this public good by charging individuals their willingnesses to pay for that quantity.Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers4 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M Y9.1Unanimous Consent on Public Goods LevelsLindahl Pricing FIGURE 9-1Lindahl Pricing • Panel (a) shows Ava’s marginal willingness to pay for fireworks, and panel (b) shows Jack’s marginal willingness to pay for fireworks. These marginal willingnesses to pay are summed in panel (c). The marginal cost of a firework is $1, so the optimal level of firework provision is 75 fireworks, the point at which marginal cost equals the sum of willingness to pay.Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers5 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M Y9.1Unanimous Consent on Public Goods LevelsLindahl Pricingbenefit taxation Taxation in which individuals are taxed for a public good according to their valuation of the benefit they receive from that good.The equilibrium is also the efficient level of public goods provision, the point at which the sum of the social marginal benefits of the public good is set equal to social marginal cost.Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers6 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M Y9.1Unanimous Consent on Public Goods LevelsProblems with Lindahl PricingPreference Revelation ProblemPreference Knowledge ProblemPreference Aggregation ProblemThe first problem is that individuals have an incentive to lie about their willingness to pay, since the amount of money they pay to finance the public good is tied to their stated willingness to pay.Even if individuals are willing to be honest about their valuation of a public good, they may have no idea of what that valuation actually is.Even if individuals are willing to be honest and even if they know their valuation of the public good, there is a final problem: How can the government aggregate individual values into a social value?Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers7 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M Y9.2Mechanisms for Aggregating Individual PreferencesAPPLICATIONDirect Democracy in the United StatesThrough three and a half centuries, the tradition of direct democracy, whereby individuals directly vote on the policies that affect their lives, remains strong in America—and, indeed, has grown throughout the twentieth century.referendum A measure placed on the ballot by the government allowing citizens to vote on state laws or constitutional amendments that have already been passed by the state legislature.voter initiative The placement of legislation on the ballot by citizens.Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers8 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M Y9.2Mechanisms for Aggregating Individual PreferencesMajority Voting: When It Worksmajority voting The typical mechanism used to aggregate individual votes into a social decision, whereby individual policy options are put to a vote and the option that receives the majority of votes is chosen.To be consistent, the aggregation mechanism must satisfy three goals:Dominance.Transitivity.Independence of irrelevant alternatives.Majority voting can produce a consistent aggregation of individual preferences only if preferences are restricted to take a certain form.---single peaked preferencesPublic Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers9 of 37C H A P T E R 9 ■ P O L I T I C A L E C O N O M Y9.2Mechanisms for Aggregating Individual PreferencesMajority Voting: When It WorksThere are three types of voters in a town, with equal numbers in each group:Parents.Elders.Young couples without children. TABLE 9-1Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers10 of 37C H A P T E R 9 ■ P O L I