Prof. Bryan Caplan

bcaplan@gmu.edu

http://www.bcaplan.com

Econ 410

 

HW#1  (Please TYPE all answers; answer TEN of your choice).

 

1.  Contrast the private and social benefits of each of the following (2-3 sentences each).  If you think the private and social benefits are approximately equal, explain why.

            a.  You go to a movie.

 

The private benefit is your enjoyment of the movie.  The private and social benefits are probably about equal, though your movie viewing might provide some small informational benefits to your friends and other people you talk to about movies.

 

            b.  You mow your lawn (think aesthetics).

 

The private benefit is that you have a nice-looking lawn; but there are additional social benefits of a "nice neighborhood" that spill over to your neighbors

 

            c.  You take the Metro instead of driving during rush hour.

 

The private benefit to you is just the ride; but there are additional social benefits from the reduction of road congestion during rush hour.

 

            d.  You learn how to program computers.

 

The private benefit is the additional income you can earn because you required this new skill; since customers or employers have to pay you the market value of your work, however, there are probably no additional social benefits.

 

            e.  You invent a cure for AIDS.

 

The private benefit is whatever income you can make from selling the drug.  But there are probably a lot of additional social benefits - at minimum, from "piracy" of your idea. 

 

2.  Contrast the private and social costs of each of the following (2-3 sentences each).  If you think the private and social costs are approximately equal, explain why.

            a.  You start smoking marijuana.

 

The private costs are the money you have to spend on the marijuana, the time you spend smoking, extra health risks, etc.  There would probably be some additional social costs - your parents for example might be willing to pay a large amount to have you not smoke.

 

            b.  You mow your lawn (think noise).

 

The private cost is your time, fuel, etc.  But there are additional social costs because the lawnmower's noise probably irritates your neighbors somewhat.

 

            c.  You drive late at night instead of taking the Metro.

 

The private cost is the fuel and wear-and-tear on your car.  There are probably no additional social costs, because late at night traffic congestion wouldn't be a problem anyway.

 

            d.  You put up a web page attacking organized religion.

 

The private costs are your time, web server fees, and so on.  The social costs are the misery you inflict on believers who find your webpage offensive.

 

            e.  You rob a bank.

 

The private costs are your time, expense of having a getaway car, gun, mask, and so on.  The social costs are the security measures banks take to foil your plans (guards, vaults, cameras), the fear of tellers and customers when you pull out your gun, and so on.

 

3.  Assume that national defense is a public good in the strong sense - an unsubsidized market produces NO defense even though the social benefits of it are high.  Carefully graph this market, showing the market quantity Qm and the efficient quantity Qe.  Shade the region of deadweight losses, and intuitively explain why these deadweight losses are so large. (1-2 sentences)

 

 

 

 

 

 

 

 

 

 

 

The entire region between the D and SB curves is deadweight loss.  These deadweight losses are so large because a vital product - the absence of which may lead to wide scale deaths at the hands of a conquering enemy - simply does not exist. 

 

4.  "Immigrants impose externalities on American workers by reducing wages."  Carefully explain why this claim mis-uses the notion of externalities.  (3-4 sentences)

 

All that is happening is that the S curve for labor shifts to the right; there aren't any negative side effects that the market isn't taking into account.  American workers are worse off if wages fall, but American employers are better off by the same amount.  If immigrants drive down wages by $1/hour, American workers get $1/hour less in surplus, but American employers get $1/hour in surplus more.  On balance, then, there are no negative side effects when immigrants drag wages down.  (Alternately, you could also say that the negative externality imposed on workers is exactly balanced by the positive externality on employers).

 

5.  "I give blood because I want blood to be there for me if I need it."  What would Olson say about this line of reasoning? (2-3 sentences)

 

Olson would doubt that this makes any sense.  What are the odds that the extra pints that you donate will be "just enough" to save you when you need them?  It is extremely unlikely that your donation will coincidentally save your life.

 

6.  Using the probability of decisiveness from the notes, calculate the probability that one vote changes an election's outcome if:

a.  There are 9 voters total and voters other than yourself vote "for" with p=.65.

 

, so we have:

 

 

b.  There are 2001 voters total and voters other than yourself vote "for" with p=.55.

 

 

c.  There are 50,001 voters total and voters other than yourself vote "for" with p=.47.

 

 

7.  Assume you value your time at $20/hour, and it takes an hour total to vote.  The probability that your vote changes an election's outcome is 1-in-10,000,000.  What difference in dollar value would you have to put on the two candidates' platforms to make it - on -average - selfishly profitable to vote?  (Hint: Voting will just barely pay if the expected value of voting exactly equals your value of time).

 

It will be just worth voting if:

 

Since we know that p=.0000001 (1-in-10,000,000):

 

 

Using basic algebra, then:

 

 

In other words, you would have to value your first choice $200,000,000 more than your second choice to make it selfishly profitable to vote!

 

8.  Give one new (i.e. not in my lectures) example of:

            a.  Instrumental voting

 

Voting for whichever candidate favors stricter anti-drug measures.

 

            b.  Non-instrumental voting

 

Voting for war heroes.

 

            c.  Rational voting

 

Voting for the party that has delivered higher average growth in the past.

 

            d.  Irrational voting

 

Voting for the more protectionist party because you are convinced that protection raises economic growth.

 

            e.  Single-peaked preferences

 

You most prefer to legalize all drugs, the more than better.

 

            f.  Multi-peaked preferences

 

You either want all drugs legalized or all drugs banned, but object to inconsistent policies where some are legal and others aren't.

 

9.  Using a median-voter diagram, explain why smoking regulations are stricter in California than North Carolina. (2-3 sentences)

 

Think of the dimension as "strictness of smoking regulation."  Then note that the median Californian is much more hostile to smoking than the median North Carolinian. 

 

 

 

 

 

 

 

 

10.  Suppose both Democrats and Republicans are worried about losing extremist votes by moderating too much.  Using a median-voter diagram, show their equilibrium platform choices.  Why or why don't their platforms converge? (1-2 sentences)

 

Shading indicates the votes the two parties get; note that in these diagrams they only get a fraction of the far-left and far-right voters, because moderation prompts the extremists to drop out.  If the parties eventually lose more than one extremist vote for every moderate vote they get for moderating, their platforms diverge.

 

 

 

 

 

 

 

11.  Suppose both Democrats and Republicans have already alienated extremist votes; there is nothing either party can do to win them back.  Using a median-voter diagram, show their equilibrium platform choices.  Why or why don't their platforms converge? (1-2 sentences)

 

Now there are some votes in the tails that neither party can get.  This shifts the median away from the party with more extremists.  Parties therefore cater to the NEW median; since they can't win the extremists back, they definitely get more votes if they moderate.

 

 

 

 

 

 

 

12.  Using two median-voter diagrams, explain why extending women's suffrage in the U.S. led to the Prohibition of alcohol.  (1-2 sentences)

 

The median male voter opposed prohibition; but the median voter (men and women included) favored it.  Extending the vote changed the identity of the median voter, and thereby changed policy.

 

 

 

 

 

 

 

 

13.  If you had to restrict the franchise in one way of your choice, what would it be?  Using the MVT, what is your best guess of the effect of your choice?  (3-4 sentences)

 

I would suggest restricting the vote to college graduates.  From the MVT, I would expect that a lot of foolish policies (make-work, anti-foreign, etc.) would moderate or disappear because more educated voters are more likely to see their futility.  Other effects: Politicians would change their style of speaking and reasoning to appeal to a more sophisticated audience.

 

14.  Suppose there are three Russian voters in 1917 (Nicholas, Kerensky, and Lenin) and three choices (Czarism, Social Democracy, or Communism).  Voter preferences, from most to least favorite, are as follows:

 

Nicholas: {Czarism, Social Democracy, Communism}

Kerensky: {Social Democracy, Communism, Czarism}

Lenin: {Communism, Czarism, Social Democracy}

 

Is there a "Condorcet winner" among the three choices?  Are the alternatives intransitive?  Explain.  (2-3 sentences)

 

There is no Condorcet winner.  Czarism beats Social Democracy, Social Democracy beats Communism, and Communism beats Czarism.  Thus, the alternatives are indeed intransitive.