There are three issues most governments have to deal with on a regular basis: how much to tax, how much to spend, and whether to increase or decrease services to one or more parts of the community. The Principal-Agent problem we studied implies that Governments will not act to maximise the utility of their constituents, but rather to stay in power: their interests will only coincide with the those of society by accident on most occasions. At all times the government's objectives must be taken into account when considering the impacts of any potential changes in policy.
2. The Median Voter Theorem.
Imagine there are three people in the world, or three large groups, A, B, and C. Imagine A prefers policy 1 to policy 2, and B prefers policy 2 to policy 1. Neither B nor A will deviate from their preferences. Who decides in this situation? Person C. Their preferences actually dominate. Knowing this, someone willing to change the incumbent policy will target all of their efforts at the median voter---the person in the middle, in terms of preferences.
The median voter theorem connects nicely with other descriptions of reality: of course you will target your policies at the more ideologically neutral (and numerous) voters, and of course, over time, you will 'dumb down' the content or message of your policy in order to encourage as many voters into your 'camp' as you can.
Government is the largest single actor in the economy.Government has extraordinary powers to regulate, legislate, and tax, and it can change individual behaviour with the types of policies it pursues. The government is therefore a microeconomic agent--in the sense of creating markets, ensuring the functioning of the market system, etc--and a macroeconomic agent, tasked with the stability of the general market structure.
3. Arrow's Impossibility Theorem
As talk of Ireland's economic sovereignty becomes either passé or Joe Duffy'd, it becomes important to try and understand the development of 'choice' amongst various agents with differing preferences. Arrow (196X) showed that the most efficient form of organisation of society is a 'rational' dictator, where the preferences of only one person (or group) matter for policy choices. Arrow's work on Social Choice theory has spawned an enormous literature, including an attempt to stimulate debate on whether there is *any* role for government in society at all.
You will learn in the second half of this course that yes, there *is* a role for government in society, and that role is crucial. We'll also apply both the impossibility theorem, and the median voter theorem, to the problem of social choice in Ireland---what happens when society must choose which groups must lose over a protracted period?
