Prof. Bryan Caplan

Econ 410


HW#4  (Please TYPE all answers).


Cooter, Questions 1 and 2, pp.217-218.


1.  If the upper house preferences move to the right, the Pareto set shrinks; if it moves to the left, it expands.


2.  If the upper house preferences move to the right, the Pareto set expands.



Additional Questions


1.  Suppose that the "status quo" level of spending is not $0, but $1 M.  The approval of a lower house (L) and an upper house (H) is required to pass new legislation.  In 2-3 sentences, explain why this could be diagramed in the following way:




$0                  $L1M                $L                     $U1M                   $U                $1M


In the previous diagrams we considered, the default was $0, so it was vital to show the level of spending such that agents were indifferent to spending nothing at all.  But if the default is $1 M, we must instead show the level of spending such that agents are indifferent to spending $1 M.  In both cases, we want to diagram the default spending level AND the point of indifference with the default spending level.


2.  How should you diagram the Pareto set and the bargain set on the above diagram?


The Pareto set still goes from $L to $U.  If spending falls below $L, both houses prefer higher spending; if spending rises above $U, both houses prefer lower spending.


The bargain set runs from $U1M to $U.  Since the default is $1 M, the lower house cannot bargain for less spending than $U1M.  If they tried, the upper house could refuse to make a deal and get $1 M exactly, which they strictly prefer to any level below $U1M.


3.  Suppose there were a Supreme Court that wanted to make spending as high as possible.  What is the highest level of spending on the above diagram they could impose by "creative reinterpretation"?


The Supreme Court can make any point in the Pareto set "stick."  So if they wanted maximal spending, they would pick $U.


4.  Name a specific example of an unpopular policy that exists because of special interest activity.  How has this special interest managed to get its way? (2-3 sentences)


An unpopular policy that existed until recently was a set of restrictions on satellite provision of national TV networks.  Before 2000, satellite providers were only allowed to provide ABC, CBS, NBC, and Fox if standard reception was deemed inadequate by the FCC.  The main forces lobbying for these restrictions seemed to be cable companies and local networks.  It is unclear exactly how they got their way, but the key to success was probably being actively involved in communications regulation before satellite TV was a serious force.  Since the issue was too boring for the public to pay much attention, and satellite companies were still getting off the ground, cable companies and local networks were probably the only active players and accordingly got their way.


5.  Give an example of (a) a policy with concentrated benefits and diffuse costs; (b) a policy with concentrated costs and diffuse benefits.  Explain. (2-3 sentences)


(a) Subsidies to the Kennedy Center.  All Americans pay them, but DC-area residents get almost all of the benefit of subsidized entertainment.


(b) Building a new prison.  The costs fall heavily on people who own nearby homes that fall in value; the benefits go to everyone who wants law-breakers to spend time in jail.


6.  Suppose the government gives one firm the sole right to make cars.  This firm is able to charge a monopoly price, earning $10 billion in monopoly profits per year.  Carefully explain why - due to rent-seeking - even the monopoly producer of cars may be no better off as a result of government intervention in the car industry. (3-4 sentences)


Whoever wins the privilege gets $10 billion.  This means that various groups will intensely lobby in order to raise their chances of winning the privilege.  They will have to hire armies of lawyers, consultants, political insiders, and so on to plead their case.  As in other competitive markets, then, we should expect economic profits to disappear, which happens once total spending on lobbying equals $10 billion and net profits are zero.  If this contest happens repeatedly, even the firm with the monopoly privilege will on average earn no more than a normal rate of return.


7.  Which has better (or less bad) effects on political competition: spending limits or term limits?  Explain your answer using economic arguments. (3-4 sentences)


Suppose that politicians really do become worse agents of voters as their time in office goes up.  Then I would expect term limits to have better effects than spending limits.  Spending limits make it harder for a well-funded challenger to beat an incumbent; term limits further prevent incumbents from repeatedly winning reelection.


8.  List three services the federal government provides and three services provided by the state of Virginia.  How many are public goods at all?  Which are closer to being pure public goods, and which are closer to being local public goods?  Does Virginia actually focus more on local public goods than the federal government does?  (2-3 sentences)


federal: Social Security, Medicare, Small Business Administration

Virginia: public schools, George Mason, police


I doubt any of these are public goods, with the possible exception of police.  Police are clearly more local - having an extremely efficient Oakton police force might actually raise the crime rate n Vienna by scaring criminals away!  Many people argue public schools, by raising levels of human capital are a public good.  Other problems with this view aside, this sounds more like a pure public good than a local one.  Overall, it is not clear from my examples that Virginia focuses more on local public goods than the feds do.


9.  Milton Friedman famously proposed a "voucher" system to replace public education.  According to the Tiebout model of local government behavior, would there be significant benefits of this program?  How would this change if Caplan's critique of the Tiebout model (and non-profit competition generally) is correct? (3-4 sentences)


According to the Tiebout model, public education is already, in a sense, competitively supplied.  Local governments have to provide quality education for tax dollars, because if they don't, people will move to other districts that do.  Thus, on the Tiebout view, the benefits of the voucher system would be small or non-existent, because there is already competition.  In contrast, on Caplan's view, non-profits aren't trying to maximize population (or property values, or whatever), so public schools might be quite inefficient.  In this case, the benefits of a voucher program could be quite large - since vigorous for-profit competition would replace lackluster non-profit competition.


10.  Using economic arguments, comment on the following: "Due to the 'race to the bottom,' it is more efficient for the federal government, rather than the states, to control welfare policy." (3-4 sentences)


The main problem with this argument, in my opinion, it that is assumes that government tends to supply the level of welfare that most benefits the median voter.  I would argue, however, that because of its expressive value, democracies consistently over-supply welfare.  Everyone wants to feel like a "caring person" regardless of the consequences.  Any interstate "race to the bottom" is a desirable counter-balance to democracy's tendency to over-supply welfare.