Lecture notes of the fourth seminar of Managerial Economics, Business, and Politics:
Criticism of nonmarket action, social choice theory, and introduction to political analysis
Part I – Criticism of non-market action model
Institutions
Institutions provide an arena in which interests deploy their non-market strategies. The
preferences of officeholders in the institution can affect the outcome.
It is important for companies to realise how the political process works identify who the
important players are so you know who to talk to.
Nonmarket strategies for government arenas
1. For many firms and industries, the rules of the game are provided by institutions
through legislation.
2. Business and other interests have the right to participate in government processes:
1. Participation requires effective strategies.
2. Law-making decisions in government almost always involve voting.
3. Remember: votes are the currency in the non-market environment.
Criticism of nonmarket action by Business
1. Isn’t business participation in the legislative process against the public interest?
2. If governments choose policies that are in the public interest then, should firms not try
to influence governments?
Maximising social welfare
1. What policy is good for society? Economists would say that the one that maximises
social welfare.
2. Economists often reference to a social planner, which is a person or institution that
would act in such a way as to maximise a given definition of social welfare.
3. We need a social welfare function (SWF) that aggregates utilities of individuals. These
two functions are extremes.
1. Utilitarian welfare function (Benthamite welfare perspective)
2. Maximin welfare function (Rawlsian perspective)
What SWF do we use?
1. Utilitarian welfare function (Benthamite welfare function)
, = The government chooses a policy that maximises the aggregate utility of every member of
society. The government sums up the utilities of all individuals. This function looks like
this:
Figure 1. Utilitarian welfare function
1. Where ui is the individual’s utility.
The government tries to maximise the sum of all the utilities of the individuals and chooses
between policies by comparing in which policy the sum of the utilities are higher.
1. Policy A is preferred to policy B if the sum of the utilities of people in society is higher
than the sum of utilities if policy B would be enacted.
Example in slide 10:
Drawbacks of this function:
2. It depends on type of government (socialist vs liberal) and on their preference. The
government can choose the policy that it wants.
3. It is not concerned with inequality.
4. A utilitarian assessment involves measuring, aggregating, and comparing individuals’
utilities. This is a demanding informational requirement because, in reality, we don’t
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