Chapter 05 – Public Goods, Public Choice, and Government Failure

Chapter 05 – Public Goods, Public Choice, and Government Failure

McConnell Brue Flynn 22e

DISCUSSION QUESTIONS

1. What are the two characteristics of public goods? Explain the significance of each for
public provision as opposed to private provision. What is the free-rider problem as it
relates to public goods? Is U.S. border patrol a public good or a private good? Why?
What type of good is satellite TV? Explain. LO1

Answer: Public goods are nonrival (one person’s consumption does not prevent
consumption by another) and nonexcludable (once the goods are produced,
nobody—including free riders—can be excluded from the goods’ benefits). If
goods are nonrival, there is less incentive for private firms to produce them—
those purchasing the good could simply allow others the use without
compensation. Similarly, if goods are nonexcludable, private firms are unlikely to
produce them as the potential for profit is low.

The free-rider problem occurs when people benefit from the public good without
contributing to the cost (tax revenue proportionate to the benefit received).

The U.S. border patrol is a public good—my use and benefit does not prevent
yours.

Satellite TV is a private good—if the dish, receiver, and service go to my

residence, it can’t go to my neighbors. The fact that I could invite my neighbors
over to watch does not change its status from being a private good.

2. Explain how affirmative and negative majority votes can sometimes lead to
inefficient allocations of resources to public goods. Use the information in Figures
5.2a and 52b to show how society might be better off if Garcia were allowed to buy
votes. LO2

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Chapter 05 – Public Goods, Public Choice, and Government Failure

Answer: The problem arises because the one-person one-vote rule does not allow
voters to register the strength of their preferences. In the text’s example, three
people—Garcia, Johnson, and Lee—have preferences with regard to the benefits
of national defense as follows: It is worth $700 to Garcia, $250 to Johnson, and
$200 to Lee for a total of $1,150 worth of benefits. The national defense program
would cost $900 to be borne by each voter equally, or $300 each. This program
would lose a majority vote because neither Johnson nor Lee would be willing to
pay $300 for it. However, the total benefit to society in this three-voter world
would have been $1,150. A “no” vote is therefore inefficient in the economic
sense.

On the other hand, suppose the program was worth $100 to Garcia, but $350 each
to Johnson and Lee for a total benefit of $800. In this case the program would
win because both Lee and Johnson would vote for it, but Garcia would not. The
$900 spending program would be approved even though it was worth only $800
to society. In this case a “yes” vote is inefficient in the economic sense.

In Figure 5.2a, since Garcia would receive a net benefit of $400 ($700 value –
$300 in additional taxes) from the public good, she would be willing to spend up
to $400 to buy votes to help the measure pass. For example, if Garcia were to pay
Johnson $60 to change his vote, it would be in Johnson's best interest to do so
since he receives $250 of value from the public good and $60 from Garcia (which
is greater than his cost of $300). The measure would pass, leading to a more
efficient economic outcome. (Note that if Garcia spent more than $250 buying
votes that would also lead to an inefficient economic outcome since the value of
the public good to society would be less than the total cost.)

In Figure 5.2b, Garcia would incur a net loss of $200 if the measure passes, so it
would be in her best interest to spend up to $200 to help defeat the measure. If she
paid Johnson $60 to change his vote to "no," Johnson would receive more
economic benefit by voting against the measure. The measure would fail, leading
to a more efficient economic outcome. Note that buying votes in the United States
is illegal. Even though it could lead to more efficient economic outcomes in some
cases, other complicating factors need to be considered.

3. “Majority voting ensures that government will produce only those public goods for
which benefits exceed costs.” Discuss. LO2

Answer: The statement is incorrect. A number of government failures and voting

paradoxes can lead to situations in which a government overprovides a public
good and produces beyond the amount at which MB = MC. Inefficient voting
outcomes and the paradox of voting may be to blame.

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Chapter 05 – Public Goods, Public Choice, and Government Failure

4. “The problem with our democratic institutions is that they don’t correctly reflect the
will of the people! If the people—rather than self-interested politicians or lobbyists—
had control, we wouldn’t have to worry about government taking actions that don’t
maximize allocative and productive efficiency.” Critique. LO2

Answer: The statement is false. Due to voter failure and the problem that
economically inefficient policies are often very popular with the electorate.

5. Does traditional one-person-one-vote (1p1v) majority voting allow voters to directly

express differences in strengths of preference? Does quadratic voting do any better?
Discuss the differences and then explain which system you prefer, and why. LO2
Answer: Traditional one-person-one-vote (1p1v) majority voting does NOT
allow voters to directly express differences in strengths of preference because a
single voter's vote only counts once regardless of the strength of preference (or
how much the voter stands to gain or lose from a public good).

Quadratic voting is an alternative voting mechanism that leads to fewer

inefficient voting outcomes than 1p1v. Under quadratic voting, the winning side
of an election (Yes or No) is still determined by the “50 percent plus 1” majority
voting rule that you are familiar with. But under a quadratic voting system, voters
can purchase and then cast as many votes as they desire. Naturally, voters with
strong preferences will wish to buy more votes because the outcome matters more
for them than for people with weak preferences.

Under quadratic voting, the cost of purchasing votes is quadratic, meaning that it
increases exponentially with the square of the number of votes purchased. With
quadratic voting, each voter will purchase votes up to the point where the
marginal benefit from purchasing additional votes equals the marginal cost of
purchasing additional votes. Thus, this system would yield more socially efficient
outcomes than the one-person-one-vote system, which does not enable voters to
express the strength of their preferences.

6. Jean Baptiste Colbert was the Minister of Finance under King Louis XIV of France.
He famously observed, “The art of taxation consists in so plucking the goose as to
obtain the largest possible amount of feathers with the smallest possible amount of
hissing.” How does his comment relate to the special-interest effect? LO3

Answer: The logic above applies to special interests and collective action as well.
In the case of special interest and collective action, the large gains to the smaller
group motivates these individuals to be more active politically and financially
than the larger group who faces small losses at the individual level. That is, the
smaller group will extract resources from the larger group until it is no longer
politically feasible.

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Chapter 05 – Public Goods, Public Choice, and Government Failure

7. What is rent seeking and how does it differ from the kinds of profit maximization and
profit seeking that we discussed in previous chapters? Provide an actual or
hypothetical example of rent seeking by firms in an industry, by a union, or by a
professional association (for example, physicians, schoolteachers, or lawyers). Why
do elected officials often accommodate rent-seeking behavior, particularly by firms,
unions, and professional groups located in their home states? LO3

Answer: Rent seeking is an appeal to the government for special benefits at

taxpayers or someone else's expense. The term 'rent' refers to any payment is
excess of the minimum amount that is necessary to keep the resource employed in
its current use. Rent-seeking is different from profit maximization because rent-
seeking attempts to influence the political process to gain increased profit or
income. Standard profit maximization and profit seeking is driven by market
forces, such as new products, cost minimization, etc.

Examples will vary. An industry may try to block imports explicitly or implicitly
using tariffs and/or non-tariff barriers. Canada's beef producers might argue that
they are concerned about mad-cow disease to block imports of U.S. beef. A union
may restrict access to employment or negotiate as a block to keep wages higher
than the market wage. Professional associations may require certification and
testing to actively participate in the market.

These groups tend to be politically more active and willing to spend resources
supporting individuals who support their respective objectives. Thus, a politician
is likely to support their activities.

8. How does the problem of limited and bundled choice in the public sector relate to
economic efficiency? Why are public bureaucracies possibly less efficient than firms?
LO3

Answer: Limited and bundled choice in the political process tends to reduce
economic efficiency because blocks of public goods and social programs are
provided. That is, instead of evaluating each public good and social program on
its respective costs and benefits the politician chooses all programs together.
Some of these goods and programs may benefit society (positive net benefits), but
others may hurt society (negative net benefits).

The private market is driven by profit. If a company continues to lose money or

produces a good that society does not want it goes out of business. If the public
sector, a bureaucracy, fails to use its resources efficiently then the market is not
there to discipline it. In this case, the bureaucracy continues to operate
inefficiently and may actually grow in size in an attempt to 'fix' the inefficiency.
However, we need to look carefully at the logic underlying this argument. Most
bureaucratic operations do not provide private goods. They provide public goods

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Chapter 05 – Public Goods, Public Choice, and Government Failure

and social services that correct potential market failures through regulation and
direct provision. Thus, the market analogy may not apply.

9. Explain: “Politicians would make more rational economic decisions if they weren’t
running for reelection every few years.” LO3

Answer: Because political officeholders must seek voter support every few years,
they favor programs with immediate and clear-cut benefits and with vague or
deferred costs. Conversely, politicians will reject programs with immediate and
easily identifiable costs but with long term, less measurable benefits. Such biases
can lead politicians to reject economically justifiable programs and to accept
programs that are economically irrational. Politicians may make these and other
irrational decisions in order to curry favor with the voters.

10. Critique: “Thank goodness we have so many government regulatory agencies. They
keep Big Business in check.” LO3

Answer: Government regulatory agencies sometimes fall under the sway of the
industries that they are supposed to be regulating. Those instances of “regulatory
capture” imply that this statement is overly confident in the ability of government
regulatory agencies to keep powerful businesses in check. If regulatory capture
occurs, the captured regulator ceases to be a truly independent watchdog looking
out for the better interests of the public. Instead, it often imposes regulations that
reduce competition and promote high levels of profit in the “regulated” industry.

11. LAST WORD What are the pluses and minuses of corporate location subsidies?
Why do politicians like them so much? Would you be surprised to know that many of
the 238 cities bidding for Amazon’s HQ2 offered much larger location subsidies than
did New York City and Alexandria, Virginia? Explain.

Answer: Attracting a large corporation has obvious advantages to a locale. First

of all, an increase in jobs will increase local economic activity. The increased
spending also helps boost local businesses. Often the increased activity will attract
start-up businesses to the area, creating even more jobs and opportunities for local
residents. The obvious downside is the cost of the location subsidies to local or
state taxpayers. The costs of the subsidies often outweigh the benefits. In addition,
a large corporation moving into a locale can have negative indirect effects such as
increased traffic and higher costs of housing and other resources for local
residents.

Location subsidies are very attractive to politicians because many of them love to
be seen at ribbon-cutting ceremonies, looking as though they personally are
responsible for bringing new businesses, new jobs, and economic growth to their

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Chapter 05 – Public Goods, Public Choice, and Government Failure

area. That’s an illusion, of course, but one that serves the political goal of getting
reelected. Consequently, the subsidies are an example of government failure
induced by the principal-agent problem that exists between the voters who must
pay for subsidies and the politicians whose main goal is staying in office.

New York and Arlington were the most natural locations for Amazon from the
very start due to their proximity to major population centers and airports and other
distribution infrastructure that Amazon needs as the western hemisphere’s largest
Internet retailer. This made many people suspect that Amazon would have put
HQ2 in New York City and Arlington no matter what. Thus, there would have
been no need for either city to give away billions in taxpayer subsidies; they
would have gotten HQ2 anyway.

REVIEW QUESTIONS

1. Draw a production possibilities curve with public goods on the vertical axis and
private goods on the horizontal axis. Assuming the economy is initially operating on
the curve, indicate how the production of public goods might be increased. How
might the output of public goods be increased if the economy is initially operating at
a point inside the curve? LO1

Answer: On the curve, the only way to obtain more public goods is to reduce the
production of private goods (from C to B). An economy operating inside the curve
can expand the production of public goods without sacrificing private goods (say,
from A to B) by making use of unemployed resources.

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Chapter 05 – Public Goods, Public Choice, and Government Failure

2. Use the distinction between the characteristics of private goods and public goods to
determine whether the following should be produced through the market system or
provided by government: (a) French fries, (b) airport screening, (c) court systems, (d)
mail delivery, and (e) medical care. Explain your answers. LO1

Answer:
a. French fries: Market system (rival and excludable)
b. Airport screening: Government
c. Court systems: Government
d. Mail delivery: Combined market and government. The law gives the postal
service a monopoly, but services such as package delivery have private
competition.
e. Medical care: Combined market and government. The mix of private and
public production is a controversial topic addressed in the chapter on the
economics of health care.

3. We can apply voting paradoxes to the highway construction example of Table 5.2.
Suppose there are only five people in a society, and each favors one of the five
highway construction options listed in Table 5.2. (“No new construction” is one of
the five options). Explain which of these highway options will be selected using a
majority paired-choice vote. Will this option be the optimal size of the project from
an economic perspective? LO2

Answer: Project B (new 2-lane highway) wins using a paired-choice vote. There
is no paradox of voting here, and B is the preference of the median voter. The two
voters who favor no new construction and widening, respectively, will prefer new
2-lane highways—project B—to new 4- or 6-lane highways. The two voters
preferring new 4- and 6-lane highways will prefer a new 2-lane highway to
widening or no new construction. The median voter’s preference for B will
prevail. However, the optimal size of the project from an economic perspective is
C, as it would provide a greater net benefit to society than B.

4. True or False: The median voter model explains why politicians so often stake out
fringe positions that appeal only to a small segment of the electorate. LO2

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Chapter 05 – Public Goods, Public Choice, and Government Failure

Answer: False
The median voter model does NOT explain why politicians so often stake out
fringe positions that appeal only to a small segment of the electorate. What it
actually does is explain why politicians so often take positions that appeal to the
median voter who prefers moderate positions.

The motivation for politicians to appeal to the median voter and advocate
moderate positions is a result of the procedure of majority voting itself. In order
to win an election, a politician needs to get 50 percent plus one of the votes. That
implies that she must win the vote of the median voter, the voter holding the
middle position on the issues at stake in the election. Only if the politician can
capture this person’s support can she win the election.

Her attempt to capture the support of the median voter will also tend to draw in a
lot of the voters on either side of the median voter. This is true because the
extreme voters on either policy stance that would appeal to the other side’s
extreme voters. So, for this reason as well, politicians will tend to take positions
that appeal to the median voter.

5. In Figure 5.2b, we saw that traditional one-person-one-vote (1p1v) majority voting

results in an inefficient majority Yes vote (two in favor, one opposed). Let’s see
whether the outcome is better under quadratic voting. LO2
a. How much will Garcia be willing to spend on votes?
b. How much each will Johnson and Lee be willing to spend on votes?
c. How many votes will Garcia purchase? How many will Johnson and Lee each
purchase?
d. What is the total number of votes cast for No? For Yes?
e. Approval of this project requires a 50-percent-plus-1 majority. Will the project be
approved?
f. Does quadratic voting lead to the economically efficient outcome here?

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Chapter 05 – Public Goods, Public Choice, and Government Failure

Answer:
a. The proposed public project has a net value of –$200 to Garcia ($100 value –
$300 in additional taxes). Therefore, Garcia would be willing to spend up to
$200 on "no" votes to prevent the project from passing to avoid the $200 loss.

b. The proposed public project has a net value of $50 each to Johnson and Lee
($350 value – $300 in additional taxes). Therefore, Johnson and Lee would be
willing to spend up to $50 each on "yes" votes to help the project pass because
that is the value of the public good to each of them individually.

c. Because the net value of the public project to Garcia is –$200 (as explained in
part a), she will buy 14 votes ($142 = $196). She would not buy 15 votes
because the cost of 15 votes ($152 = $225) would exceed the value of avoiding
the $200 loss. Because the net value of the public project to Johnson and Lee
is $50 each (as explained in part b), they will each buy 7 votes ($72 = $49).
They would not buy 8 votes each because the cost of 8 votes ($82 = $64)
would exceed the $50 value of the project to each individual.

d. The total number of "yes" votes cast will be 14 and the total number of "no"
votes cast will be 14 (as explained in part c).

e. If the project requires a 50-percent-plus-1 majority, the project will NOT be

approved because the number of "yes" votes would not exceed the 50-percent
threshold.

f. In this case, quadratic voting leads to an economically efficient outcome

because the total cost of the project ($900 in additional taxes) exceeds the
total value that the individual voters place on the project ($100 + $350 + $350
= $800).

6. Tammy Hall is the mayor of a large U.S. city. She has just established the Office of
Window Safety. Because windows sometimes break and spray glass shards, every
window in the city will now have to pass an annual safety inspection. Property
owners must pay the $5-per-window cost—and by the way, Tammy has made her
nephew the new head of the Office of Window Safety. This new policy is an example
of: LO3
a. political corruption
b. earmarks
c. rent seeking
d. adverse selection

Answer: Rent-seeking. This new policy is an example of rent seeking.

By creating the new set of regulations, Mayor Hall has provided her nephew with
a way to collect an economic rent, which by definition is a payment in excess of

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Chapter 05 – Public Goods, Public Choice, and Government Failure

the minimum amount needed to keep an economic resource employed in its

current use. In this case, all of the city’s windows would have kept on being
employed in their current use—as windows—even without the new window
inspection fees. Thus, the entire $5-per-window fee that is collected by her
nephew will be an economic rent.

By contrast, the window-inspection policy is not an example of political

corruption, earmarks, or adverse selection.

It is not an example of political corruption because what is being done here is

perfectly legal. Nobody is bribing public officials to either do something illegal
or to get them to perform a service that they should be providing to the public for
free. The new policy is stupid, but Tammy’s nephew will in fact be obeying the
law when making inspections and demanding $5 for each one. So, there is no
political corruption going on here.

There are also no earmarks because this new policy has nothing to do with
legislators authorizing special expenditures for political supporters or friends.
Finally, this law has nothing to do with adverse selection because it has nothing to
do with one party to a contract possessing more information than another party to
the contract.

7. Suppose that total costs (TC) double for each project listed in Table 5.2. Which
project(s) is (are) now economically viable? LO3

a. Plan A only
b. Plans C and D only
c. Plans B and C
d. Plans A and B only

Answer: We answer this question by comparing the marginal cost of each project
to the marginal benefit of each project. If the marginal benefit of a project exceeds
the marginal cost, then the project is economically viable. In other words, if the
net benefit (marginal benefit minus marginal cost) is positive, then the project is
economically viable. In this case, if the total cost of each project doubles, the

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Chapter 05 – Public Goods, Public Choice, and Government Failure

marginal benefit exceeds marginal cost for Plan A only. Therefore, Plan A is the
only economically viable option.

8. Explain the paradox of voting through reference to the accompanying table, which
shows the ranking of three public goods by voters Colbert, Fallon, and Kimmel: LO3

Answer: The paradox is that majority voting does not always provide a clear and
consistent picture of the public’s preferences. Here the courthouse is preferred to
the school (both Colbert and Fallon ranked the courthouse ahead of the
school), and the park is preferred to the courthouse (both Colbert and Kimmel
ranked the park ahead of the courthouse). Given this, we would surmise that the
park is preferred to the school. But paired-choice voting would show that the
school is preferred to the park (both Fallon and Kimmel ranked the school ahead
of the park).

PROBLEMS

1. On the basis of the three individual demand schedules below, and assuming these are
the only three people in the society, determine (a) the market demand schedule on the
assumption that the good is a private good and (b) the collective demand schedule on
the assumption that the good is a public good. LO1

Answers:

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Chapter 05 – Public Goods, Public Choice, and Government Failure

(a) Market demand schedule

Quantity Price
Demanded
1 $8
2 $7
4 $6
7 $5
10 $4
13 $3
16 $2
19 $1

(b) Collective demand schedule

Quantity Amount Society is

Willing to Pay
1 $19
2 $16
3 $13
4 $10
5 $7
6 $4
7 $2
8 $1

Feedback:
Part (a): Derive the market demand schedule on the assumption that the good is a
private good. To accomplish we use the principle of horizontal summation. That
is, we fix price and add up the quantities demanded by the individuals.

At a price of $8: individual 1 (I1) demands 0, individual 2 (I2) demands 1, and

individual 3 (I3) demands 0. Thus, we have the following market demand ordered
pair (1,8).

At a price of $7: I1 demands 0, I2 demands 2, and I3 demands 0. Thus, we have

the following market demand ordered pair (2,7).

At a price of $6: I1 demands 0, I2 demands 3, and I3 demands 1. Thus, we have

the following market demand ordered pair (4 [=3+1],6).

At a price of $5: I1 demands 1, I2 demands 4, and I3 demands 2. Thus, we have

the following market demand ordered pair (7[=1+4+2],5).

At a price of $4: I1 demands 2, I2 demands 5, and I3 demands 3. Thus, we have

the following market demand ordered pair (10,4).

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Chapter 05 – Public Goods, Public Choice, and Government Failure

At a price of $3: I1 demands 3, I2 demands 6, and I3 demands 4. Thus, we have

the following market demand ordered pair (13,3).

At a price of $2: I1 demands 4, I2 demands 7, and I3 demands 5. Thus, we have

the following market demand ordered pair (16,2).

At a price of $1: I1 demands 5, I2 demands 8, and I3 demands 6. Thus, we have

the following market demand ordered pair (19,1).

Part (b): Derive the collective demand schedule on the assumption that the good
is a public good. To accomplish we use the principle of vertical summation. That
is, we fix quantity and add up the price (willingness to pay) for the individuals.
The logic here is that the individuals (society) can pool resources to purchase a
given quantity because this good will be shared (public good).

At the quantity 1: I1 is willing to pay $5, I2 is willing to pay $8, and I3 is willing
to pay $6. Thus, we have the following collective demand ordered pair (1,19 = 5
+ 8 + 6).

At the quantity 2: I1 is willing to pay $4, I2 is willing to pay $7, and I3 is willing
to pay $5. Thus, we have the following collective demand ordered pair (2,16).

At the quantity 3: I1 is willing to pay $3, I2 is willing to pay $6, and I3 is willing
to pay $4. Thus, we have the following collective demand ordered pair (3,13).

At the quantity 4: I1 is willing to pay $2, I2 is willing to pay $5, and I3 is willing
to pay $3. Thus, we have the following collective demand ordered pair (4,10).

At the quantity 5: I1 is willing to pay $1, I2 is willing to pay $4, and I3 is willing
to pay $2. Thus, we have the following collective demand ordered pair (5,7).

At the quantity 6: I1 is willing to pay $0, I2 is willing to pay $3, and I3 is willing
to pay $1. Thus, we have the following collective demand ordered pair (6,4).

At the quantity 7: I1 is willing to pay $0, I2 is willing to pay $2, and I3 is willing
to pay $0. Thus, we have the following collective demand ordered pair (7,2).

At the quantity 8: I1 is willing to pay $0, I2 is willing to pay $1, and I3 is willing
to pay $0. Thus, we have the following collective demand ordered pair (8,1).

2. Use your demand schedule for a public good, determined in problem 1, and the
following supply schedule to ascertain the optimal quantity of this public good. LO1

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Chapter 05 – Public Goods, Public Choice, and Government Failure

Answer: 4 units

Feedback:

Collective Demand Schedule:

Quantity Price Society is

Willing to Pay
1 $19
2 $16
3 $13
4 $10
5 $7
6 $4
7 $2
8 $1

Combining this collective demand schedule with the following supply schedule,
we can determine the optimal provision (quantity) of the public good.

The optimal quantity can be found by finding the price where the willingness to
pay equals price required by the firm to supply that last unit (basically the price
that clears the market). For example, at $19 society demands one unit but firms
are willing to supply 10 units. At $16 society demands 2 units but firms are
willing to supply 8 units. This continues until we reach the price of $10 where
society demands 4 units and firms are willing to supply 4 units. Thus, the optimal
quantity is 4 units.

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Chapter 05 – Public Goods, Public Choice, and Government Failure

3. Look back at Figures 5.2a and 5.2b, which show the costs and benefits to voters
Garcia, Johnson, and Lee of two different public goods that the government will
produce if a majority of voters support them. Suppose that Garcia, Johnson, and Lee
have decided to have one single vote at which the funding for both of those public
goods will be decided simultaneously. LO2

a. Given the $300 cost per person of each public good, what are Garcia’s net
benefits for each public good individually and for the two combined? Will she
vote yes or no on the proposal to fund both projects simultaneously?
b. What are Lee’s net benefits for each public good individually and for the two
combined? Will she vote yes or no on the proposal to fund both projects
simultaneously?
c. What are Johnson’s net benefits for each public good individually and for the two
combined? Will he vote yes or no on the proposal to fund both projects
simultaneously —or will he be indifferent?
d. Who is the median voter here? Who will the two other voters be attempting to
persuade?

Answer:
a. Garcia’s net benefit for the good in 5.2a is $400 (= $700 of benefit minus
$300 of cost). Her net benefit for the public good in 5.2b is -$200 (= $100 of
benefit minus $300 of cost). Thus, her combined net benefit for both projects
is $200 (= $400 from the first project -$200 from the second project) and she
will want to vote yes on funding both projects simultaneously.

b. Lee’s net benefit for the public good in 5.2a is -$100 (=$200 of benefit minus
$300 of cost). Her net benefit for the public good in 5.2b is $50 (= $350 of
benefit minus $300 of cost). Thus, her combined net benefit for both projects
is -$50 (= $100 from the first project + $50 from the second project) and she
will want to vote no on funding both projects simultaneously.

c. Johnson’s net benefit for the public good in 5.2a is -$50 (= $250 of benefit

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Chapter 05 – Public Goods, Public Choice, and Government Failure

minus $300 of cost). His net benefit for the public good in 5.2b is $50 (=
$350 of benefit minus $300 of cost). Thus, his combined net benefit for both
projects is $0 (= -$50 from the first project + $50 from the second project) and
he will be indifferent.

d. Johnson is the median voter whose preference is “in the middle” and whose
vote will decide the outcome. Thus, Garcia and Lee will put their efforts
towards persuading Benson to vote for their respective positions.

4. Political advertising is often directed at winning over so-called swing voters, whose
votes might go either way. Suppose that two political parties—the Freedom Party
and the Liberty Party—disagree on whether to build a new road. Polling shows that
of 1,000 total voters, 450 are firmly for the new road and 450 are firmly against the
new road. Thus, each party will try to win over a majority of the 100 remaining
swing voters. LO2
a. Suppose that each party spends $5,000 on untargeted TV, radio, and newspaper
ads that are equally likely to reach any and all voters. How much per voter will be
spent by both parties combined?
b. Suppose that, instead, each party could direct all of its spending towards just the
swing voters by using targeted ads that exploit Internet social media. If all of the
two parties’ combined spending was targeted at just swing voters, how much
would be spent per swing voter?
c. Suppose that only the Freedom Party know how to target voters using social
media. How much per swing voter will it be spending? If at the same time the
Liberty Party is still using only untargeted TV, radio, and newspaper ads, what
portion of its total spending is likely to be reaching the 100 swing voters? How
much per swing voter does that portion amount to?
d. Looking at your answers to part c, how much more per swing voter will the
Freedom Party be spending than the Liberty Party? If spending per swing voter
influences elections, which party is more likely to win?

Answer:

a. The two parties combined will spend $10,000 (= $5,000 + $5,000). That
amounts to $10 per voter (= $10,000 of total combined advertising spending
divided by 1000 total voters).

b. If all advertising could be targeted at just the swing voters, the parties would
spend $100 per swing voter (= $10,000 of total combined advertising
spending divided by 100 swing voters).

c. Thanks to knowing how to target just swing voters, the Freedom Party will
spend $50 per swing voter (= $5,000 of targeted ad spending divided by 100
swing voters). By contrast, because the Liberty Party is using untargeted ads,
only about $500 of its $5,000 of advertising spending will flow to swing
voters (because swing voters constitute 100 out of 1000, or 10 percent of the
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Chapter 05 – Public Goods, Public Choice, and Government Failure

total electorate). Thus, the Liberty Party will end up spending about $5 per
swing voter (= $500 divided by 100 swing voters) as a result of using
untargeted ads.

d. The Freedom Party will be spending about $45 more per swing voter (=$50
per swing voter by the Freedom Party minus $5 per swing voter by the Liberty
Party) thanks to its sole use of targeted ads. If spending per swing voter
influences elections, the Freedom Party is more likely to win.

5. Let’s see whether quadratic voting can avoid the paradox of voting that arose in Table
5.3 when using 1p1v in a series of paired-choice majority votes.

To reexamine this situation using quadratic voting, the nearby table presents the
maximum willingness to pay of Garcia, Johnson, and Lee for each of the three public
goods. Notice that each person’s numbers for willingness to pay match her or his
ordering of preferences (1st choice, 2nd choice, 3rd choice) presented in Table 5.3.
Thus, Garcia is willing to spend more on her 1st choice of national defense ($400)
than on her second choice of a road ($100) or her third choice of a weather warning
system ($0). LO2

a. Assume that voting will be done using a quadratic voting system and that Garcia,
Johnson, and Lee are each given $500 that can only be spent on purchasing votes
(i.e., any unspent money has to be returned). How many votes will Garcia
purchase to support national defense? How many for the road? Place those values
into the appropriate blanks in the table below and then do the same for the blanks
for Johnson and Lee.

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Chapter 05 – Public Goods, Public Choice, and Government Failure

b. Across all three voters, how many votes are there in favor of national defense?
The road? The weather warning system?
c. If a paired-choice vote is taken of national defense versus the road, which one
wins?
d. If a paired-choice vote is taken of the road versus the weather warning system,
which one wins?
e. If a paired-choice vote is taken of national defense versus the weather warning
system, which one wins?
f. Review your answers to parts c, d, and e. Has quadratic voting eliminated the
paradox of voting that we found when using 1p1v?

Answer:
a. Under a quadratic voting system, each rational voter would be willing to
purchase votes up to the point where the marginal benefit from purchasing an
additional vote equals the marginal cost of purchasing an additional vote. For
example, if Garcia places a $400 value on national defense, it would be
rational for her to pay up to $400 to buy votes in favor of national defense.
This is the point where MB = MC (for this example, we assume there are no
additional costs beyond the cost of purchasing votes). Since the total cost of
buying votes is the number of votes squared, we can find the number of votes
by taking the square root of the marginal benefit of each public good for each
individual voter. If Garcia spends $400 on votes for national defense, she can
buy = 20 votes. Since she places a $100 value on the road, she will buy = 10
votes. Similarly, Johnson will spend up to $50 to buy votes for national
defense, so he will buy = 7.07 or 7 votes. (We truncate the decimal places
since we assume votes must be purchased in whole numbers.) He will also
spend up to $150 to buy 12 votes (= 12.247). We follow the same procedure
to calculate that Lee will buy 10 votes for the road and 15 for the weather
warning system.

Note that it would also be valid to argue that Johnson might buy 8 votes for
national defense and Lee might buy 16 votes for the weather warning system.
In these cases, the marginal costs would slightly exceed the marginal benefits.
However, since the voters have to return any unspent money and they have
enough of the $500 remaining to buy the additional vote, one could argue that
it could be in their interest to do so since it is not actually their money.

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Chapter 05 – Public Goods, Public Choice, and Government Failure

b. We can find the total number of votes for each project simply by adding
together the numbers in each row. Doing so, we get the following results:
Votes for national defense = 20 + 7 + 12 = 39. Votes for road = 10 + 17 + 10
= 37. Votes for weather warning system = 0 + 12 + 15 = 27.

c. In a paired-choice vote between national defense and the road, national

defense would win with a 2-to-1 vote because national defense is a higher
preference for both Garcia and Lee.

d. In a paired-choice vote between the road and the weather warning system, the
road would win with a 2-to-1 vote because it is a higher preference than the
weather warning system for both Garcia and Johnson.

e. In a paired-choice vote between national defense and the weather warning

system, the weather warning system would win with a 2-to-1 vote because it is
a higher preference for both Johnson and Lee.

6. Consider a specific example of the special-interest effect and the collective-action

problem. In 2012, it was estimated that the total value of all corn‐production
subsidies in the United States totaled about $3 billion. The population of the United
States was approximately 300 million people that year. LO2
a. On average, how much did corn subsidies cost per person in the United States in
2012? (Hint: A billion is a 1 followed by nine zeros. A million is a 1 followed by
six zeros.)
b. If each person in the United States is only willing to spend $.50 to support efforts
to overturn the corn subsidy, and if anti‐subsidy advocates can only raise funds
from 10 percent of the population, how much money will they be able to raise for
their lobbying efforts?
c. If the recipients of corn subsidies donate just one percent of the total amount that
they receive in subsidies, how much could they raise to support lobbying efforts
to continue the corn subsidy?
d. By how many dollars does the amount raised by the recipients of the corn subsidy
exceed the amount raised by the opponents of the corn subsidy?

Answers: (a) $10 (b) $15 million (c) $30 million (d) $15 million

Feedback: Consider the following example: In 2012, it was estimated that the
total value of all corn‐production subsidies in the United States totaled about $3
billion. The population of the United States was approximately 300 million people
that year.

a. $10.00 (= $3 billion divided by 300 million).

b. To find the answer to this question, we first calculate the number of

individuals willing to fund the antisubsidy advocates. Since only 10 percent of

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Chapter 05 – Public Goods, Public Choice, and Government Failure

300 million are willing to provide funding, we have 30 million people

providing funding (= 0.10 × 300 million). Each of these individuals is only
willing to provide $0.50. This results in a total funding of $15 million (=
$0.50 × 30 million).

c. Since the recipients of corn subsidies receive a total of $3 billion from the
government, 1 percent of this amount is $30 million (= 0.01 × $3 billion).

d. $15 million (= $30 million – $15 million).

7. Consider a corrupt provincial government in which each housing inspector examines

two newly built structures each week. All the builders in the province are unethical
and want to increase their profits by using substandard construction materials, but
they can’t do that unless they can bribe a housing inspector into approving a
substandard building. LO2
a. If bribes cost $1,000 each, how much will a housing inspector make each year in
bribes? (Assume that each inspector works 52 weeks a year and gets bribed for
every house he inspects.)
b. There is a provincial construction supervisor who gets to hire all of the housing
inspectors. He himself is corrupt and expects his housing inspectors to share their
bribes with him. Suppose that 20 inspectors work for him and that each passes
along half the bribes collected from builders. How much will the construction
supervisor collect each year?
c. Corrupt officials may have an incentive to reduce the provision of government
services to help line their own pockets. Suppose that the provincial construction
supervisor decides to cut the total number of housing inspectors from 20 to 10 in
order to decrease the supply of new housing permits. This decrease in the supply
of permits raises the equilibrium bribe from $1,000 to $2,500. How much per
year will the construction supervisor now receive if he is still getting half of all
the bribes collected by the 10 inspectors? How much more is the construction
supervisor getting now than when he had 20 inspectors working in part (b)? Will
he personally be happy with the reduction in government services?
d. What if reducing the number of inspectors from 20 to 10 only increased the
equilibrium bribe from $1,000 to $1,500? In this case, how much per year would
the construction supervisor collect from his 10 inspectors? How much less is the
construction supervisor getting than when he had 20 inspectors working in part
(b)? In this case, will the construction supervisor be happy with the reduction in
government services? Will he want to go back to using 20 inspectors?

Answer:
a. $104,000 (= 52 weeks times 2 bribes per week times $1,000 per bribe).

b. $1,040,000 (= 20 inspectors times one half times each inspector’s annual total
bribe amount of $104,000).

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Chapter 05 – Public Goods, Public Choice, and Government Failure

c. $1,300,000 (= 10 inspectors times one half times each inspector’s new annual
total bribe amount of $260,000). That annual total bribe amount of $260,000
= $2,500 per bribe times two bribes per week times 52 weeks per year. The
construction supervisor will personally be happy with this reduction in
government services because it substantially increases his personal income.

d. $780,000 (= 10 inspectors times one half times each inspector’s new annual
total bribe amount of $156,000.) The construction supervisor will not be
happy with this reduction in government services. He will want to go back to
using 20 inspectors because he personally received a higher income from
bribes when there were 20 inspectors.

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