Economics 410 Midterm Answer Key

Prof. Bryan Caplan

Spring, 2009

 

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:  Caplan claims that everyone is completely selfish.

 

FALSE.  Caplan specifically states that “I interpret "people are self-interested" as "on average, people are at least 95% selfish," not "all people are 100% selfish,” and notes many counter-examples, especially in his discussion of the SIVH.

 

 

2. Suppose the distribution of voters’ bliss points on the left-right spectrum is double-peaked.

 

T, F, and Explain:  Democracy is likely to break down due to social intransitivity.

 

FALSE.  A bimodal distribution of bliss points does not lead to social intransitivity!  Social intransitivities can emerge when individual voters do not have single-peaked preferences; but a distribution of bliss points just shows us everyone’s first choice, and nothing about anyone’s number of preference peaks.  A bimodal distribution of bliss points on an important issue often leads to a civil war or other breakdown of democracy; but the reason is sharp disagreement – and the tendency of small preference changes to cause large policy changes – not intransitivity.

 

 

3. In the last election, McCain won 53% of the “65 and older” votes.

 

T, F, and Explain:  The Median Voter Model does not imply that McCain would have won the election if Americans had to be 65 or older in order to vote.

 

TRUE.  Changing the franchise would have changed the median voter, which would in turn have changed the platforms both candidates adopted.  Obama and McCain would have adjusted their stances to appeal more to the elderly.  The MVM can’t tell us who would have won after these adjustments.

 

4.  Suppose that there are three voters who put the following dollar values on political outcomes:

 

 

Czarism

Social Democracy

Communism

Czar Nicholas

$3000

$600

$0

Kerensky

$0

$800

$300

Lenin

$100

$0

$2000

 

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

 

FALSE.  With zero transactions costs, Czarism would win, because the voters’ total willingness to pay for Czarism is higher than either of the other two alternatives.  The Czar would simply have bribed Kerensky and Lenin to vote his way.  With high transactions costs, in contrast, there is social intransitivity, so the winning policy depends upon the order in which the alternatives are voted upon.

 

 

5.  The General Social Survey asks respondents whether they agree or disagree that ”those with high incomes should pay a larger proportion (percentage) of their earnings in taxes than those who earn low incomes.”  The estimated probability that someone agrees that “those with high incomes should pay a larger proportion” is:

 

1.145  -.024 * Polviews -.045 * Log(Real Income) +.061 * Black.

 

(Polviews is a 1-7 measure of how liberal or conservative you are (higher indicates more conservative); Black =1 if the respondent is black, and 0 otherwise).

 

T, F, and Explain:  On this question, the evidence supports a mixture the SIVH, ideological voting, and group-interest voting.

 

TRUE.  The negative coefficient on Polviews indicates that more conservative voters are more opposed to progressive taxation, consistent with ideological voting.  The negative coefficient on Log(Real Income) indicates that higher-income voters are more opposed to progressive taxation, consistent with the SIVH.  The positive coefficient on Black indicates that, all else equal, blacks are more in favor of progressive taxation, consistent with the group-interest story that people support policies that they think are good for their group.

 

 

6.  T, F, and Explain:  Contrary to many economists, the median voter actually supports Social Security, farm subsidies, foreign aid, and tariffs.

 

FALSE.  Public opinion data discussed in class shows that the median voter supports Social Security, farm subsidies, and tariffs.  However, the same data shows that the median voter does not support foreign aid.  In fact, foreign aid is the standard example of an program that manages to survive despite its unpopularity.

 

 

 

Part 2: Short Answer

(20 points each)

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

 

1.  Carefully explain why pollution taxes are more efficient that quantitative emissions limits.  Then present two explanations for why democracies would favor the less efficient approach.  Which explanation is more likely to be right – and why?

 

Pollution taxes are more efficient than quantitative emissions limits because of heterogeneity.  The cost of reducing pollution varies from firm to firm; so does the benefit of polluting.  Pollution taxes therefore make it possible to get the same level of pollution reduction at a lower cost.

 

You might say that democracies stick with quantitative emissions limits because that’s what the median voter wants.  The reason might be rational ignorance, or some kind of a “fairness” preference.  Another story, though, is that polluters prefer and lobby for quantitative emissions limits, which are weakly enforced and/or impose an extra burden on new entrants.

 

I think that the median voter explanation is more likely to be right.  Non-economists generally resist the idea of pollution taxes.  And a lot of polluting firms – the ones with low abatement costs – could actually be better off if the tax puts some of their competitors out of business.

 

 

2.  If the Median Voter Theorem worked, what would Dye and Zeigler predict would happen to policy?  Give details.

 

According to Dye and Zeigler, the American masses are highly intolerant, and actually oppose many of the civil liberties that elites take for granted: “The public gives only superficial support to fundamental democratic values – freedom of speech and press and due process of law.”  If the MVT worked, for example, there would be more restrictions on academic freedom, more restrictions on speech of foreigners and atheists, more anti-gay policies, and less support for the rights of the accused.  Dye and Zeigler points out several cases where the median voter specifically opposes the status quo.  For example, 53% say that atheists should not be allowed to “make fun of God and religion” “in a public place where religious groups gather.”