Economics 410 Midterm Answer Key

Prof. Bryan Caplan

Fall, 2011


Part 1: True, False, and Explain

(10 points each - 2 for the right answer, and 8 for the explanation)

State whether each of the following six propositions is true or false.  In 2-3 sentences (and clearly-labeled diagrams, when helpful), explain why.


1.  T, F, and Explain: If education has positive externalities, there is a clear efficiency argument for public schools.


FALSE.  Even if there are positive externalities, there is no reason for direct government provision.  Subsidies or vouchers can correct the externality problem without actual public schools.  As the notes explain, when positive externalities are the problem, government ownership is “overkill.”  [I gave partial credit to students who pointed out that only some subjects might have positive externalities.]




2. Suppose you’re a genuinely sociotropic voter.  You believe Candidate A will make the average person $100 better off than Candidate B.  You vote as long as the social benefit of voting exceeds your private cost of $20. 


T, F, and Explain:  If there are 10,000 voters besides yourself, and each votes for Candidate A with 50% probability, you will vote.


TRUE.  Your probability of decisiveness is , or about 1/125.  The social benefit of your vote is therefore the per-capita gain times the number of people times p: $100*10,001/=$7979.64, much greater than $20.  So you’ll vote.




3.  T, F, and Explain:  People who don’t even bother to vote certainly won’t bother move to another state because it has “better policies.”


FALSE.  People’s probability of changing the policies they live under by voting is extremely small.  But their probability of changing the policies they live under by moving is extremely high – simply move to the state where you like policies better.  A person with strong policy preferences could therefore easily decide that voting is pointless, but moving well worth the effort.


4.  “According to contemporary surveys, a right-wing minority of American voters wants to outlaw abortion, and a left-wing minority wants to outlaw the death penalty... On cost-benefit grounds, would it be better for the minority to gets its way on both issues or for the majority to get its way on both issues?” (Cooter, The Strategic Constitution)


T, F, and Explain:  Cooter concludes that catering to the minority preferences is clearly inefficient.


FALSE.  Cooter is asking an open-ended question, not stating a conclusion.  He would argue that the cost-benefit analysis could go either way.  It depends on the intensity of the minorities’ preferences and their number.  As intensity and number go up, catering to minority preferences becomes more likely to pass a cost-benefit test.




5.  “Our research on the self-interest hypothesis began as an incidental byproduct of our work on whites’ political resistance to racial change.” (Sears and Funk, “Self-Interest in Americans’ Political Opinions)


T, F, and Explain:  Sears and Funk found that objective self-interest has an unusually large effect on people’s positions on racial issues.


FALSE.  Sears and Funk discuss three different studies that compare the effects of self-interest (objective “racial threat”) to the effects of racial intolerance (“symbolic racism”).  Their finding: “Racial intolerance dominated self-interest in all three studies...”  [Note: Merely stating the general conclusion that the SIVH is false without actually referring to the reading received minimal points.]




6.  Government spending on retirees is growing at an unsustainably high rate.  Candidate A says, “We need to restrain spending to make sure there’s still money available for your retirement.”  Candidate B says, “We need to restrain spending to make sure we can continue to take care of all American retirees.”


T, F, and Explain:  Empirical public opinion research suggests that Candidate B’s argument will be more persuasive to voters.


TRUE.  Candidate A is appealing to voter self-interest, Candidate B to sociotropic concerns.  And the empirical evidence strongly indicates that voters are barely selfish and highly sociotropic.


Part 2: Short Answer

(20 points each)

In 4-6 sentences, answer both of the following questions.


1. American politics has two main parties split on left-right ideological lines.  Why might you expect the United States to have a two-party system split on educational lines instead?  Why doesn’t it?


Education, unlike ideology, has little effect on party identification.  But both have strong effects on issue positions.  Highly educated people from both parties are more economically conservative and socially tolerant; they’re relatively pro-immigration, pro-market, pro-gay marriage, etc.  So if parties were just coalitions of people with similar issue views, a party system divided on educational lines would make about as much sense as the party system we’ve got.  There are several possible reasons why we don’t see an education-based split.  High-education people almost inevitably wind up running parties, so maybe a low-education party would soon be “subverted” by its own leadership.  Maybe people are just more socially comfortable affilating on ideological lines.  Maybe a high-education party would be uncomfortably elitist.  Or maybe it’s just an historical accident.



2. Name a major policy change you predict will happen in the next ten years.  Using everything you have learned, carefully explain why you think this policy change is likely to occur.


I think we’ve likely to eliminate the Social Security payroll tax phase-out for high-income voters.  The budgetary situation is gradually becoming more desperate, so before too long the government will have to choose between cutting expensive popular programs (SS, Medicare, defense) or higher taxes.  Even people who don’t benefit from these programs see them as socially desirable, so higher taxes are the path of least resistance.  Since voters are largely sociotropic, they probably wouldn’t be comfortable explicitly making “the rich” pay the full burden.  But it’s easy to frame the SS payroll tax phase-out as the elimination of a loophole rather than class warfare.  When you put it that way, even rich voters are likely to admit that this change is the least of available evils.