Economics 410 Midterm

Prof. Bryan Caplan

Fall, 2013

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. Suppose donating blood has positive externalities.

T, F, and Explain: Requiring every healthy person to donate blood would be the most efficient solution.

FALSE.  Requiring every health person to donate would be hugely inefficient because donation costs vary widely from person to person.  Some people don’t mind donating, others faint at the sight of needles, and the value of time depends on donor’s wages.  Simply subsidizing blood donation would be far more efficient.

2. Suppose you’re a genuinely sociotropic voter.  You believe Candidate A will make the average person \$1000 better off than Candidate B.  You vote as long as the social benefit of voting exceeds your private cost of \$50.

T, F, and Explain:  If there are 25,000 voters besides yourself, and each votes for Candidate A with 50% probability, you will vote.

TRUE.  The social benefit equals # voters * gain per voter * p, where p is the probability of decisiveness.  This in turn equals:

25,001*\$1000*=25,001*\$1000*=\$126,162, which vastly exceeds your \$50 private cost.

3.  Suppose 20% of voters want to increase defense spending, 40% want to reduce it, and 40% was to keep it at its current level.

T, F, and Explain:  According to the Median Voter Theorem, the current level of defense spending must be efficient.

FALSE.  The current level equals the level desired by the median voter, but this level is not necessarily efficient.  The efficient outcome, rather, is to satisfy the mean preference, which takes taste intensities into account.

4.  “But the large economic groups that are organized do have one common characteristic which distinguishes them from those large economic groups that are not...” (Olson, The Logic of Collective Action)

T, F, and Explain:  According to Olson, the “one common characteristic” is ideology.

FALSE.  According to Olson, the one common characteristic is privately valuable “by-products” such as social and recreational benefits.  In Olson’s words: “The common characteristic which distinguishes all of the large economic groups with significant lobbying organizations is that these groups are also organized for some other purpose.  The large and powerful lobbies are in fact the by-products of organizations that obtain their strength and support because they perform some function in addition to lobbying for collective goods.”

5.  T, F, and Explain:  Sears and Funk (“Self-Interest in Americans’ Political Opinions”) find little evidence for self-interested voting by women or the elderly, but strong evidence for self-interested voting by government employees.

FALSE.  Sears and Funk find little evidence for self-interested voting by women: “[W]omen have not generally supported women’s issues more than have men.”  The same goes for the elderly: Their support for Social Security and Medicare spending is the same or weaker than younger voters.  But S&F also find only weak evidence for self-interested voting by government employees: “public employees and recipients of government services were expected to defend the public sector out of self-interest, but showed only scattered support for it.”

6.  The General Social Survey asks:

`“Do you think the number of immigrants to America nowadays should be...”  Results:`
` `
 `Response` `# ` `Increased a Lot` `351` `Increased a Little` `725` `Remain the Same as It Is` `3113` `Reduced a Little` `2303` `Reduced a Lot` `2526`
` `

T, F, and Explain:  This is evidence against the Median Voter Theorem.

TRUE.  The MVT predicts that “remain the same as it is” will be the median position.  But the actual median position is “reduced a little.”  While this is hardly conclusive, it is a piece of evidence against the MVT.

Part 2: Short Answer

(20 points each)

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

1. In the United States, the foreign-born are much less hostile to foreign aid spending than the native-born.  How would the SIVH, group-interest, and ideological voting models explain this difference?  Which story is actually most important?  Explain your answer.

The SIVH would say that the foreign-born are more likely than natives to have blood relatives and/or investments in countries that receive foreign aid.

Group-interest would say that the foreign-born are more likely than natives to identify with and care about people in countries that receive foreign aid.

Ideological voting would say that the foreign-born are more liberal than natives, and hence more supportive of the liberal (pro-foreign aid) position on this issue.

The group-interest story is probably the most important: People really do continue to identify with “their” home country for generations.  The SIVH is quite weak: Are the foreign-born with lots of blood relatives in their home country really significantly more pro-foreign aid than the foreign-born with few such relatives?  The ideological voting story is probably correct, but the difference in liberalism between foreign-born and native is much smaller than the gap in their views on foreign aid.

2. In 50 years, what will the main dimension of American politics be?  If your answer is “still liberal versus conservative,” how will these terms have evolved?  Be specific, and try to connect your predictions to current trends.

The main dimension will probably still be called “liberal versus conservative,” but the content will heavily evolve over time.  Over the next 50 years, U.S. voters will become much less white, much older, and probably less socially conservative.  As a result, conservatism will become much more welcoming of non-whites, and move away from social conservatism.  At the same time, the aging of the U.S. population will eventually require big changes in taxes and old-age programs.  Both ideologies will move in the direction of higher taxes and more means-testing of government benefits, with “more means-testing” becoming the conservative view, and “higher taxes” becoming the liberal view.