Chapter 6 – Political Economy
1. a. Below, the preferences for Person 1 and Person 2 are drawn. Same procedure is
used for the other three people.
b. C wins in every pairwise vote. Thus, there is a stable majority outcome, despite the
fact that persons 1, 2, and 3 have double-peaked preferences. This demonstrates that
although multi-peaked preferences may lead to voting inconsistencies, this is not
necessarily the case.
2. The belief that the tax bill will pass because it contains provisions sought by so many
different lawmakers is consistent with the logrolling model. It could be the case that each lawmaker has inserted favored provisions with the understanding that other lawmakers will support the overall package provided it contains the provisions they favor.
Without vote-trading, neither bill would pass. If there is vote-trading, then voter B would agree to support issue X provided voter A supports Issue Y, allowing both bills to pass. The change in net benefits is +3 for Issue X and -2 for Issue Y, so logrolling results in a gain of +1.
Yes, it is consistent, because the theory says that when unanimity is required, no decisions are likely to be made. A majority system might be more suitable, although it is subject to cycling and other problems.
Assuming that the preferences of Kuwaiti women differ from the preferences of Kuwaiti men, stronger voter turnout by women could invalidate the median voter theorem. That is, the results of majority voting would not reflect the preferences of the median voter.
When there is a vote over five options, there is the chance that a potential majority vote is split between four relatively preferred options, and the fifth option wins. The winning option may have been voted down if it had been a two-way vote with any of the other options. Further, if preferences are not single-peaked, cycling and inconsistent public decisions may emerge. 3. 4. 5. 6.
19
Part 2 – Public Expenditure: Public Goods and Externalities
7. Given the U.S. experience with the Budget Enforcement Act of 1990, we would expect
the EU deficit limits to be ineffective. We would expect “accounting tricks” to mask the size of the deficits (such as itemizing various budget items as “unexpected emergencies”), and if that didn’t work, we would expect the deficit rules to be ignored. This is apparently what is happening. When Germany exceeded the deficit target, no moves were taken to levy the required fines.
Since rents, by definition, are the returns above a normal return, then when the licenses are put on the market, their price will be the value of the rents. Hence, the owner of the peanut license, whoever he or she is, only makes a normal return. Put another way, the license is an asset that earns a normal rate of return. If the peanut license system were eliminated, efficiency would be enhanced. But the elimination would, in effect, confiscate the value of this asset. It is not clear that this is fair. One could also argue that when someone buys this asset, the purchase is with the understanding that there is some probability that its value will be reduced by elimination of the program; hence, it is not unfair to do so.
a.
b. With the demand curve of Q=100-10P and a perfectly elastic supply curve at P=2, then the milk is sold at a price of $2, and a quantity of 80 units is sold. The marginal revenue curve associated with the inverse demand curve P=10-
(1/10)Q is MR=10-(1/5)Q, while the marginal cost curve is MC=2. The cartel
would ideally produce a quantity where MR=MC, or 10-(1/5)Q=2, or Q=40. The
price associated with a cartel quantity of 40 units is P=10-(1/10)*40, or P=6.
The rent associated with the cartel is the product of the marginal profit per unit
and the number of units produced. The marginal profit per unit of milk is $4 (=$6
price - $2 marginal cost), while 40 units are produced. Thus, the rents equal $160.
The most the cartel would be willing to contribute to politicians is the full
economic rent of $160. The cartel situation, the quantity of milk produced is too
low from society’s point of view. The deadweight loss triangle is computed using
the difference between the cartel output and competitive output as the “base” of
the triangle, and the difference between the cartel price and competitive price as
the “height.” Thus, the triangle is equal to (1/2)*(80-40)*($6-$2)=$40.
As Figure 6.5 in the textbook shows, the deadweight loss could now go as high as
the sum of the conventional deadweight loss and the rents, or $160 rents + $80
DWL = $240. This is because, as noted in the text , “rent-seeking can use up
resources – lobbyists spend their time influencing legislators, consultants testify
before regulatory panels, and advertisers conduct public relations campaigns.
Such resources, which could have been used to produce new goods and services,
are instead consumed in a struggle over the distribution of existing goods and
services. Hence, the rents do not represent a mere lump-sum transfer; it is a
measure of real resources used up to maintain a position of market power.” 8. 9. c. d. e.
20
Chapter 6 – Political Economy
10. Niskanen’s model of bureaucracy is illustrated in Figure 6.4 of the textbook. In the
aftermath of September 11th , the new concerns over food safety would likely shift the V curve upward (that is, the value placed on each level of Q ). Assuming that C curve (costs per unit of Q ) does not change, then this shift increases the actual number of food inspectors hired. It is also likely that the slope of the V curve changes, with each marginal unit of Q becoming more valuable. Thus, the V curve not only “shifts” upward, but becomes steeper as well. Both of these effects – the shifting of the V curve and the change in the slope – lead to greater values of Q under the bureaucracy model. The change in the slope leads to a greater value of Q *, the efficient level of output. Thus, the optimal number of FDA employees and the actual number of FDA employees are likely to rise.
a.
b.
The outcome of the first election (M vs. H) is M. The outcome of the second election (H vs. L) is L. The outcome of the third election (L vs. M) is M. Majority rule leads to a stable outcome since M defeats both H and L. Giving one person the ability to set the agenda would not affect the outcome in this case. With the change in Eleanor’s preference ordering, majority rule no longer generates a stable outcome. In a vote between M and H, the outcome is H. In a vote between H and L, the outcome is L. In a vote between L and M, the outcome is M. So, giving one person the ability to set the agenda affects the outcome. For example, Abigail prefers H, so she might pit L against M first in order to eliminate L and avoid having L defeat H. 11.
21
Chapter 6 – Political Economy
1. a. Below, the preferences for Person 1 and Person 2 are drawn. Same procedure is
used for the other three people.
b. C wins in every pairwise vote. Thus, there is a stable majority outcome, despite the
fact that persons 1, 2, and 3 have double-peaked preferences. This demonstrates that
although multi-peaked preferences may lead to voting inconsistencies, this is not
necessarily the case.
2. The belief that the tax bill will pass because it contains provisions sought by so many
different lawmakers is consistent with the logrolling model. It could be the case that each lawmaker has inserted favored provisions with the understanding that other lawmakers will support the overall package provided it contains the provisions they favor.
Without vote-trading, neither bill would pass. If there is vote-trading, then voter B would agree to support issue X provided voter A supports Issue Y, allowing both bills to pass. The change in net benefits is +3 for Issue X and -2 for Issue Y, so logrolling results in a gain of +1.
Yes, it is consistent, because the theory says that when unanimity is required, no decisions are likely to be made. A majority system might be more suitable, although it is subject to cycling and other problems.
Assuming that the preferences of Kuwaiti women differ from the preferences of Kuwaiti men, stronger voter turnout by women could invalidate the median voter theorem. That is, the results of majority voting would not reflect the preferences of the median voter.
When there is a vote over five options, there is the chance that a potential majority vote is split between four relatively preferred options, and the fifth option wins. The winning option may have been voted down if it had been a two-way vote with any of the other options. Further, if preferences are not single-peaked, cycling and inconsistent public decisions may emerge. 3. 4. 5. 6.
19
Part 2 – Public Expenditure: Public Goods and Externalities
7. Given the U.S. experience with the Budget Enforcement Act of 1990, we would expect
the EU deficit limits to be ineffective. We would expect “accounting tricks” to mask the size of the deficits (such as itemizing various budget items as “unexpected emergencies”), and if that didn’t work, we would expect the deficit rules to be ignored. This is apparently what is happening. When Germany exceeded the deficit target, no moves were taken to levy the required fines.
Since rents, by definition, are the returns above a normal return, then when the licenses are put on the market, their price will be the value of the rents. Hence, the owner of the peanut license, whoever he or she is, only makes a normal return. Put another way, the license is an asset that earns a normal rate of return. If the peanut license system were eliminated, efficiency would be enhanced. But the elimination would, in effect, confiscate the value of this asset. It is not clear that this is fair. One could also argue that when someone buys this asset, the purchase is with the understanding that there is some probability that its value will be reduced by elimination of the program; hence, it is not unfair to do so.
a.
b. With the demand curve of Q=100-10P and a perfectly elastic supply curve at P=2, then the milk is sold at a price of $2, and a quantity of 80 units is sold. The marginal revenue curve associated with the inverse demand curve P=10-
(1/10)Q is MR=10-(1/5)Q, while the marginal cost curve is MC=2. The cartel
would ideally produce a quantity where MR=MC, or 10-(1/5)Q=2, or Q=40. The
price associated with a cartel quantity of 40 units is P=10-(1/10)*40, or P=6.
The rent associated with the cartel is the product of the marginal profit per unit
and the number of units produced. The marginal profit per unit of milk is $4 (=$6
price - $2 marginal cost), while 40 units are produced. Thus, the rents equal $160.
The most the cartel would be willing to contribute to politicians is the full
economic rent of $160. The cartel situation, the quantity of milk produced is too
low from society’s point of view. The deadweight loss triangle is computed using
the difference between the cartel output and competitive output as the “base” of
the triangle, and the difference between the cartel price and competitive price as
the “height.” Thus, the triangle is equal to (1/2)*(80-40)*($6-$2)=$40.
As Figure 6.5 in the textbook shows, the deadweight loss could now go as high as
the sum of the conventional deadweight loss and the rents, or $160 rents + $80
DWL = $240. This is because, as noted in the text , “rent-seeking can use up
resources – lobbyists spend their time influencing legislators, consultants testify
before regulatory panels, and advertisers conduct public relations campaigns.
Such resources, which could have been used to produce new goods and services,
are instead consumed in a struggle over the distribution of existing goods and
services. Hence, the rents do not represent a mere lump-sum transfer; it is a
measure of real resources used up to maintain a position of market power.” 8. 9. c. d. e.
20
Chapter 6 – Political Economy
10. Niskanen’s model of bureaucracy is illustrated in Figure 6.4 of the textbook. In the
aftermath of September 11th , the new concerns over food safety would likely shift the V curve upward (that is, the value placed on each level of Q ). Assuming that C curve (costs per unit of Q ) does not change, then this shift increases the actual number of food inspectors hired. It is also likely that the slope of the V curve changes, with each marginal unit of Q becoming more valuable. Thus, the V curve not only “shifts” upward, but becomes steeper as well. Both of these effects – the shifting of the V curve and the change in the slope – lead to greater values of Q under the bureaucracy model. The change in the slope leads to a greater value of Q *, the efficient level of output. Thus, the optimal number of FDA employees and the actual number of FDA employees are likely to rise.
a.
b.
The outcome of the first election (M vs. H) is M. The outcome of the second election (H vs. L) is L. The outcome of the third election (L vs. M) is M. Majority rule leads to a stable outcome since M defeats both H and L. Giving one person the ability to set the agenda would not affect the outcome in this case. With the change in Eleanor’s preference ordering, majority rule no longer generates a stable outcome. In a vote between M and H, the outcome is H. In a vote between H and L, the outcome is L. In a vote between L and M, the outcome is M. So, giving one person the ability to set the agenda affects the outcome. For example, Abigail prefers H, so she might pit L against M first in order to eliminate L and avoid having L defeat H. 11.
21