ECON 516 Midterm Exam #1 Solutions
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit
Midterm Exam #1 Solutions
ECON 516
2022
PART l: TRUE, FALsE, AND ExPLA1N
(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 a plurality election with three or more candidates, we can be sure that if one candidate is the Condorcet winner, then she will win the plurality election.
● FALSE. In plurality elections with more than two candidates, we have have a candidate (e.g., one in the center), who wins all head-to-head matchups among the candidates, but whose vote share in the plurality election is small due to less centrist candidates to her left and right.
2. There’s a movement across college campuses to encourage university foundations to divest from their investments in fossil fuel companies.
T, F, and Explain: This movement is likely to succesfully reduce the supply of fossil fuels.
● FALSE. This is a collective action problem. If everyone divested, then fossil fuel companies would be without the ability to raise capital for investment. However, any one institution pays a large costs and only receives part of the benefits of divestment. Worse than that, was any one divests, it pushes prices down (a pecuniary externality) that makes the investment in fossil fuel companies more attractive to others.
.
3. T, F, and Explain: Even if voter preferences are single-peaked, we are not guaranteed an equilibrium in political competition.
● TRUE. Even with single-peaked preferences, we may not have an equilibrium. For example, if there are more than two candidates or if there is more than one dimension to policy, or if voters vote strategically, then we may not have an equilibrium.
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) XpD, 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 (Alice, Betty, and Candice) who put the following dollar values on the outcomes of the Superhero election:
T, F, and Explain: Assuming people can buy and sell votes, then with zero transactions costs, Ironman would win. But with sufficiently high transaction costs, Batman will win.
Table 1: Voters’ Preferences Over Superhero Candidates
|
Batman |
Spiderman |
Ironman |
|
|
Alice |
$0 |
$20 |
$100 |
|
Betty |
$30 |
$20 |
$10 |
|
Candice |
$100 |
$0 |
$50 |
● TRUE. With zero transactions costs, society automatically reaches the result with the highest total dollar value. This is Ironman, with $160. For example, Alice values Ironman $80 more than her second favorite candidate, Spriderman. She would then be willing to pay Betty some of this surplus so that she votes for Ironman over her next favorite. Candice might try to buy off Betty with a better offer, but Candice only values Batman by $50 more than her next more preferred candidate, so Alice would win out since she’s willing to pay Betty a larger amount (up to $80). With high transactions costs, however, there’s no bargaining, and everyone simply votes for who they prefer. Since Betty and Candice both prefer Batman to EITHER of the other candidates, Batman is the Condorcet winner and will prevail.
6. T, F, and Explain: Whether something is a “private good” or “public good” depends on government policies.
● FALSE. The distinction between public and private goods depends on characteristics of those goods, not whether they are provided by the government. e.g., Public goods have the character- istics of non-exclusivity and non-rivalry.
PART 2: SnoRT 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 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. Recall that one of the ideas behind Pigovian taxation is to tax the externality directly, not just things associated with the externality.
2. Summarize Ken Arrow’s Impossibility Theorem in your own words. Why is it important in our study of political economy?
● Arrow’s Impossibility Theorem proves that there is no social choice mechanism that satisfies even the minimal set of properties we desire in a method that allows use to choose in groups (these are unanimity, transitivity, unrestricted domain, independence of irrelevant alternatives, and nondictatorship). The theorem is important because it highlights a fundamental tension in political institutions: the tradeoff between rational decision making from the group and the concentration of power.
2022-11-05