Political economy applies economic principles to the analysis of political decision making.
Economists have studied several methods for choosing levels of public goods in a direct democracy.
Lindahl pricing results in a unanimous decision to provide an efficient quantity of public goods, but relies on honest revelation of preferences.
Majority voting may lead to inconsistent decisions regarding public goods if some people's preferences are not single peaked. Logrolling allows voters to express the intensity of their preferences by trading votes. However, minority gains may come at the expense of greater general losses.
Arrow's Impossibility Theorem states that, in general, it is impossible to find a decision making rule that simultaneously satisfies a number of apparently reasonable criteria. The implication is that democracies are inherently prone to make inconsistent decisions.
Explanations of government behavior in a representative democracy require studying the interaction of elected officials, public employees, and special-interest groups.
Under restrictive assumptions, the actions of elected officials mimic the wishes of the median voter.
Public employees have an important impact on the development and implementation of economic policy. One theory predicts that bureaucrats attempt to maximize the size of their agencies' budgets, resulting in oversupply of the service.
Rent-seeking private citizens form groups to influence government activity. Special interests can form on the basis of income source, income size, industry, region, or personal characteristics.
The growth of government has been rapid by any measure. Explanations of this phenomenon include: Citizens simply want a larger government. The public sector must expand to absorb private excess production. Random events (such as wars) increase the growth of government, while inertia prevents a return to previous levels. Unrealistic expectations have resulted in increasing demands that ignore the opportunity costs of public programs. Certain groups use the government to redistribute income to themselves.
Proposals to control the growth in government include encouraging private sector competition, reforming the budget process, and constitutional amendments.