In a two-party system in a unidimensional space, the median voter's ideal policy position generally becomes the government's policy position. That is, where 50% + 1 person of the population prefer a certain policy, a two-party government would adopt that policy. The two parties vie for control of the middle of the political spectrum and policy tends to reflect this.
In a multi-party (i.e. more than two-party) system, coalitions between extreme groups can lead to sub-optimal policies, or those less preferable to the population median's preferences. Extremist parties could "trade" extreme policies with one another, all the while drawing the policy farther to the left and right from the population median's preferred position.
Imagine it this way: the wacko extremist pinko party represents 30% of the population on the far left. The independent moderates represent 40% of the population in the middle. The gun-toting facists comprise the last 30% of the population on the far right. It is possible (and it has, in fact, happened) that the two extremist parties join together to form a majority voting bloc and trade votes on issues of particular importance to them. Thus the pinkos, with the support of the far right, move every citizen into a commune, and the facists, with the support of the far left, give every newborn baby a machine gun. These policy outcomes fall far outside the preferences of the population median voter. Thus they are suboptimal from a representative standpoint.
They are also suboptimal because the pinkos would prefer the population median's position over the facists' position on gun control, and the facists would prefer the population median's positions over the pinkos' on matters of communal living. Yet the extremist positions prevail through vote trading and coalition formation. Policy does not reflect the preferences of a majority of voters.
-- Todd/Leviathn
