Economics 410 Midterm Answer Key

Prof. Bryan Caplan

Fall, 2015

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 transactions costs were zero, voters would still have an inefficiently low level of political knowledge.


FALSE.  Per the Coase Theorem, zero transactions costs guarantee full efficiency.  With zero transactions costs, voters would bargain with each other until everyone spent the SOCIALLY optimal amount of time acquiring political knowledge.



2. Suppose that for 1 election in 100, a randomly selected voter is equally likely to vote “Yes” or “No.”  In all other elections, a randomly selected voter votes “Yes” 51% of the time, “No” 49% of the time.  There are 200,000,001 voters.


T, F, and Explain:  A voter’s probability of decisiveness is approximately .


TRUE.  P(decisiveness) equals 1% times P(decisiveness with 50% chance of voting yes) plus 99% times P(decisiveness with 51% chance of voting yes):



The second term is approximately zero, so the expression is approximately equal to:






3.  T, F, and Explain:  Dye and Zeigler (The Irony of Democracy) implicitly reject the Median Voter Theorem.


TRUE.  Dye and Zeigler point out that many policies that elites take for granted – civil liberties, tolerance, and so on – are unpopular.  Since the Median Voter Theorem says that policies opposed by over 50% of the population will not exist, Dye and Zeigler implicitly reject the MVT.



4.  Suppose politicians are entirely self-interested.


T, F, and Explain: The only way to end political corruption is to drastically increase voter knowledge.


FALSE.  The theory of optimal punishment says that selfish agents (including politicians) will eschew corruption as long as the Benefit (honesty)>Benefit (corruption)-pD, where p is the probability of punishment and D is the severity of the punishment.  Low voter knowledge implies low p, but even highly ignorant voters can prevent corruption with sufficiently harsh D. 



5. Suppose that there are three voters (Koch, Willis, and Spears) who put the following dollar values on the outcomes of the Republican primaries:






Charles Koch




Bruce Willis




Britney Spears





T, F, and Explain:  With zero transactions costs, Paul would win, but with sufficiently high transaction costs, Trump will win.  


TRUE.  With zero transactions costs, society automatically reaches the result with the highest total dollar value.  This is Paul, with $1600.  With high transactions costs, however, there’s no bargaining, and everyone simply votes for who they prefer.  Since Willis and Spears both prefer Trump to EITHER of the other candidates, Trump is the Condorcet winner and will prevail.



6.  T, F, and Explain:  Given education and ideology’s effects on public opinion, we should expect professional journalists to be extremely liberal on economic issues but hold mainstream views on social issues.


Education and ideology both independently affect people’s issue views.  For economic issues, education and liberalism push in opposite directions; for social issues, education and liberalism push in the same direction.  Since, as we discussed in class, journalists are generally highly educated liberals, their education and liberalism roughly cancel out for economic issues, leaving them with mainstream views.  For social issues, however, journalists’ education and liberalism compound, leaving them with extremely liberal views.
Part 2:
Short Answer

(20 points each)

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


1. “The most efficient way to end traffic jams is for government to raise the gasoline tax until traffic jams disappear.”  Carefully explain why you agree or disagree.


I disagree.  While higher gas taxes will discourage driving, they will discourage it equally in ALL parts of the country and during ALL times of day.  In practice, however, congestion is largely limited to densely-populated areas of the country during rush hour.  The upshot: Any gas tax high enough to end congestion in the regions and times where it is a problem would also drastically discourage driving in all OTHER regions and at all OTHER times for no good reason.  Imposing tolls that vary with traffic conditions – like HOT lanes on 495 – is a much more efficient way to get traffic moving.  It gives incentives to stay off the road during peak times, without needlessly discouraging driving in general.


2.  Imagine you’re Mancur Olson.  You discover all the evidence against the SIVH and decide to add a new chapter to The Logic of Collective Action to show how the facts are consistent with your overall perspective.  Write a compelling introductory paragraph for your new chapter on “Sociotropic Voting as a Collective Action Problem.”


Due to collective action problems, political actors normally place their own interests far above society’s or their group’s.  For voting, however, ample public opinion evidence seems to show the opposite.  Material self-interest is a poor predictor of party identification or policy views; ideology and group identity, in contrast, are strong predictors indeed.  On reflection, however, these patterns actually vindicate the logic of collective action.  Due to the vanishingly small probability that one vote tips an electoral outcome, individuals can vote against their own interests – and in favor of social or group interests – for virtually no cost.  The same incentives that lead individuals to ACT on their own interests, regardless of the social effects, leading them to VOTE for social interests, regardless of the selfish effects.