Saturday, November 8, 2014

Learning economics through pictures - markets vs. voting

There are some who use economic methods to examine issues in political science - this area of work is called Public Choice Theory.

One commonly discussed issue is "the majority rule problem".

An example of this is when a small majority of voters (say 52%) has a slight preference for a particular law while a large minority of voters (48%) has a strong preference against.  In this case, the overall well-being of society will be lower when the law is passed, but we would expect the law to indeed be passed because 52% want the law.

The majority rule problem occurs because each person, regardless of how strongly he/she feels about an issue, only gets one vote.  One vote cannot measure intensity of preferences, it can only measure the direction of preferences.

This is different from markets, where intensity of preferences is measured.  For example, most people would rather have a Mercedes than a Kia, all else equal.  But the price isn't equal.  Those who most want a Mercedes can purchase one - by paying more.  The intensity of their preferences is measured based on willingness to pay.

No comments:

Post a Comment