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:� In the real world, coercive solutions to public goods problems may be Pareto improvements, but not Kaldor-Hicks improvements.

 

FALSE.� All Pareto improvements are K-H improvements, but not vice versa.� In theory, coercion can create Pareto improvements by overcoming strategic behavior (lying about your preferences, holding out for a better deal, etc.).� In the real world, though, preferences are heterogeneous enough that coercive solutions will never be Pareto improvements.� They might still be K-H improvements, though.

 

 

2. T, F, and Explain:� If you quadruple N, where (2N+1) is the number of votes, you halve the probability that one vote will be decisive.

 

FALSE.� This ignores the second part of the decisiveness formula that kicks in whenever a perfect 50/50 split is not expected.� Probability of the decisiveness is given by: .� If you quadruple N, then the �term does fall by half: =2*.� But quadrupling N further reduces �unless p=.5.

 

 

 

3. T, F, and Explain:� A per-unit tax will be efficiency-enhancing iff d>1.

 

TRUE.� Since the slope on the demand curve is 1, d=1 indicates that demand and SB perfectly overlap.� If d>1, however, SB lies below the demand curve, indicating negative externalities.� In principle a per-unit tax can be efficiency-enhancing with negative externalities.

 

4.� You can derive a formula for the difference between equilibrium quantity Q and optimal quantity Q* as a function of d.

 

T, F, and Explain:� That formula is: Q-Q*=d/(1+d).

 

FALSE.� First, solve for Q by setting S=D.� P=1-P implies that P=.5, and since Q=P, Q=.5.� Second, solve for Q* by setting S=SB.� P=1-dP implies that P=1/(1+d), and since Q=P, Q=1/(1+d) as well.� Then just take the difference: Q-Q*=1/2-1/(1+d), which simplifies to Q-Q*=[d-1]/2[1+d].

 

An easier answer I would have accepted would simply have substituted d=1 into d/(1+d).� At d=1, there is no externality, so Q-Q* should equal 0.� But it in fact equals .5, indicating that this formula is false.

 

 

5.� Cooter explains how judges are able to "reinterpret" laws in directions they favor.

 

T, F, and Explain:� The only reason this works, according to Cooter, is that legislatures find reversing judicial decisions is too time-consuming.

 

FALSE.� What Cooter shows is that judges can reinterpret laws by making sure they move to new points that lie inside the Pareto set.� If they remain within the Pareto set, there will not be a Minimum Winning Coalition willing to overturn the judicial decision.� This would be true even if time were free.

 

 

6.� Assume that Supply is given by Q=3P, Demand by Q=10-.5P, and there are no externalities.� Government sets a per-unit tax t to maximize the SUM of (tax revenue + consumers' surplus + producers' surplus).

 

T, F, and Explain:� The solution to the government's optimization problem is given by t*= 30/7.

 

FALSE.� The solution is t*=0!� Per-unit taxes have DW costs.� Since there are no externalities, and no revenue constraint, government maximizes (revenue + CS + PS) only by refraining from imposing any per-unit tax.

 

The answer would still be false if government were a revenue-maximizer: then tQ(t) would reach a maximum at t*=10.

 

 

 

 

Part 2: Short Essays

(20 points each)

In 6-8 sentences, answer all of the following questions.

 

1.� Max Stearns of the GMU law school argues that it IS in individuals' self-interest to vote because in the real world, politicians pay attention to vote share, not just whether they won or lost.� In other words, a vote does not have to be decisive to change policy.� Is Stearns right or wrong?� Why or why not?

 

Stearns is wrong, though he raises an interesting point.� Politicians do sometimes seem to want a "mandate" for change, and the larger their victory margin, the stronger they say their mandate is.� But this is irrelevant to selfish voting.� In the standard model, voters have an infinitesimal chance of changing who wins.� In the Stearns model, voters are certainly able to effect an infinitesimal change.� In both cases, self-interest argues against trading a finite amount of time for an infinitesimal benefit.

 

 

2.� It frequently happens that two senators who represent� the same state disagree.� Is there any way for the Median Voter Theorem to explain this?� Explore two theoretical possibilities and assess their empirical plausibility.

 

Senatorial elections are staggered - 1/3 face election every two years.� Therefore, two senators from the same state may not have been elected at the same time.� One way for the MVT to handle this divergence, then, is to say that citizen preferences shifted during the interim.� A different way is to say that citizen preferences stayed the same, but voter turnout changed in a skewed way.� For example, the senator who runs during the same year as the presidential election may face a different median voter due to higher (and skewed participation).

 

A third possibility that no one raised is that inter-state migration might affect things.

 

(Students suggested a number of other possibilities, but I took off points the further the answers strayed from the standard Median Voter Theorem assumptions).

 

3.� Many researchers use the Principle of Aggregation to argue that voter ignorance does not have serious policy consequences.� What empirical findings from Delli Carpini and Keeter - if any - suggest the opposite?� Carefully explain your answer.

 

Delli Carpini and Keeter show that voter knowledge is higher in certain sub-groups in the population: the well-educated and males, to take two examples.� Given selfish voting, this could skew policy in the direction of these group's interests.� Selfish voting combined with group differences is key here, though: if the well-educated and males were voting in the public interest, the Miracle of Aggregation still holds.

 

Furthermore, widespread ignorance about the basic "rules of the game" - well-documented by Delli-Carpini and Keeter - raises questions about the Principle of Aggregation.� If only 10% of all voters know, say, that spending bills must originate in the House, and the other 90% are equally likely to blame the House, the Senate, or the President for fiscal mismanagement, 60% blame the wrong body.� It is unclear how aggregation solves this problem.