Attendance to class is highly recommended. The announced dates for midterms and homeworks are final, and they cannot be rescheduled with any justification.
Standard economic models have shown that in some cases, markets are not perfect and can fail to achieve a socially optimal outcome. The question is then: how can we remedy these inefficiencies? A naïve public economic approach would state that, with appropriate tools (taxes, subsidies, public provisions, antitrust policies, regulations...), a public intervention can fix the market failure and restore the social optimum.
However, this approach is not satisfactory because it compares a realistic market system with all its imperfections to an ideal, benevolent, and omniscient government which always implements the right policy. As everyone knows, governments do not always implement socially optimal policies. Political representatives may be biased because of reelection concerns, lobbying, or outright corruption; voters can vote against their interest because they are poorly informed about the candidates and the policies they propose; even when voters are perfectly informed, majority rule does not always lead to the socially optimal decision. A realistic model of government or collective decision should take into account these political failures.
Taking into account the possibility of market failures and government failures, to assess whether public intervention is beneficial, one has to compare the potential failures of free markets, and economic freedom in general, with the potential failures of public interventions and collective action. Market failures are relatively well understood by economists. Therefore, to complete the picture, one has to understand how government and collective institutions function. This is precisely what political economy is about.
Political economy uses the modern tools of economic analysis (basic decision theory, welfare economics, incentive theory, and game theory) to analyze the functioning and failures of political institutions.
The questions that we will focus on in this class are the following:
- How to make collective decisions for a group of individuals with heterogeneous needs and preferences? What are the typical failures of different voting rule? Can we design a voting rule that makes rational decisions and that satisfies some minimal democratic requirement?
- How do governments function? Can we use parsimonious economic models to predict the level of public good provision and the degree of redistribution in a democracy?
- How does electoral competition work? Why are economic competition and electoral competition so different in nature?
- What is the role and influence of interest groups in the political process?