Study Questions 2

ECO 4554 Economics of State and Local Government Study/Test Questions Topic 2: Public Choice These questions are designed as study questions to enhance your economic knowledge and your analytical skills. I will also use them as test questions. Because you have the questions in advance, I expect your answers on the tests to be well-organized, clear, coherent, and concise. You might write trial answers to each question in advance, or at the very least, outline the answers. You may not bring any written materials to the test, but if you’ve prepared answers in advance, you can immediately begin writing and still write competent and thorough answers. Feel free to consult one another on the questions. In fact, I strongly encourage you to discuss the questions with one another. No matter how confident you are of your knowledge, your command of the material and your preparation for the test can be enhanced by sharing your knowledge. Do not, however, simply rely on your fellow students to provide you with the answers. When the time for the test comes, you will be on your own. Although in most cases, the questions do not specifically request that you illustrate your answer with an appropriate diagram, diagrams are usually quite helpful both in undertaking the analysis and in illustrating and explaining your answer. I expect you to know the relevant diagrams, to use them, and to interpret them. I encourage you to include them in your answers. 2-1. For each item below, define the term or state the theorem or explain the concept. • • • •

Median voter theorem Cyclical majority or paradox of voting Single-peaked preferences Cumulative voting or point voting

2-2. (Core Principle) Simple majority rule is not necessarily the most efficient voting rule for at least five reasons. Explain each of the five reasons. a.

Simple majority rule does not ensure that all individuals have equal influence on political decisions. [Illustrate your explanation with an example.]

b.

Simple majority rule is not necessarily the lowest-cost voting rule. [Illustrate your explanation with a diagram. Show the administrative cost of the voting rule (A), the external cost of an adverse decision (E), and the social cost of the voting rule. Indicate the percent of voters (the voting rule) that minimizes the social cost of voting. Explain in your answer why the curves have the shapes you drew.]

c.

The outcome of a simple majority rule vote may not be unique or stable; that is, simple majority rule voting may be subject to the “paradox of voting” or the “cyclical majority”. [Illustrate your explanation with an example.]

d.

The quantity of a public good or service chosen by simple majority rule may not be the economically efficient quantity. [Illustrate your explanation with a diagram. Show the marginal benefit of the median voter (MB), the median voter’s marginal tax-price (T), the 1

ECO 4554: Economics of State and Local Government Study/Test Questions: Topic 2 marginal social benefit (MSB), and the marginal cost (MC). Label the efficient quantity Q* and the equilibrium quantity using simple majority rule Q’.] e.

Simple majority rule reflects only the rank ordering of individuals’ preferences, not the strength or intensity of their preferences. [Illustrate your explanation with an example.]

2-3. There are three equal-sized groups of voters in a community choosing among three possible education spending budgets: a bare-bones budget of $3,000 per pupil per year; a moderate budget of $5,000 per pupil per year; and a richly-enhanced academics budget of $7,000 per pupil per year. The preferences of each group are shown below: Group I II III

Most Preferred $3,000 $5,000 $7,000

Second Choice $5,000 $7,000 $3,000

Least Preferred $7,000 $3,000 $5,000

a.

Construct a diagram with the rank ordering of each group’s preferences on the vertical axis and expenditure per pupil on the horizontal axis. Construct a preference line or profile for each group by plotting the points and connecting the points with lines. Are the preferences single-peaked? Explain.

b.

What level of expenditure per pupil will be chosen using simple majority rule? Why?

c.

If the preferences are not single-peaked, what is the least change you can make so that the preferences are single-peaked? With this modified set of preferences, what level of expenditure would be chosen using simple majority rule?

2-4. Suppose there are three groups of voters choosing how to spend a fixed number of dollars on a recreational facility. They have two options: a swimming pool or a gymnastics center. The table below shows the marginal benefit or willingness-to-pay per household of each group for each type of facility. Group I II III

Swimming Pool $4,000 $3,000 $9,000

Gymnastics Center $6,000 $7,000 $1,000

a.

Which facility would be chosen using simple majority rule?

b.

Suppose cumulative voting is used. Each voter is given 10 votes and the voters divide their votes between the two facilities in proportion to their marginal benefit or willingness-to-pay for each facility. Which facility is chosen using cumulative voting?

c.

How much is the marginal social benefit of each facility? If the two facilities have the same marginal social cost, which facility is more efficient in the sense of maximizing the social (in this case, consumer) surplus?

d.

Which of the two voting rules, cumulative voting or simple majority rule, is most likely to result in choice of the efficient facility? Why? 2

ECO 4554: Economics of State and Local Government Study/Test Questions: Topic 2 2-5. After reading the articles on the website on cumulative voting, explain how and why cumulative voting can increase the number of minority candidates who are successfully elected. 2-6. Oregon school budgets are chosen by voters in a referendum. The School Board submits a proposed budget to the voters for approval. If the voters approve the proposal, the budget is adopted for the coming year. If the voters reject the proposal, the School Board may offer another proposal. Ultimately, if the voters reject all the School Board’s proposals, the budget for the coming year reverts to a legally specified level. Suppose the reversion level is 40 percent of the current year budget and the current year budget is $5,000 per pupil. The median voter’s preferences are as follows: Quantity of Education (Measured by Expenditure per Pupil) $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Median Voter’s Marginal Benefit $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000

These preferences are shown in the diagram below where the axes measure thousands of dollars.

a.

If you chair the School Board and your objective is to maximize the school budget for the coming year, how large an increase in the school budget would you propose? Explain.

b.

If the reversion level is determined by the state legislature, would you as School Board chair lobby the state legislature for an increase in the reversion level, a decrease in the reversion level, or no change in the reversion level? Why?

c.

Suppose the median voter’s marginal benefit is shown below. Is the maximum expenditure level that the voters will approve larger than, equal to, or smaller than the maximum level in 2-6.a? Explain your reasoning. [Note that the curve is supposed to go through the points at which grid lines intersect. The points (1,7), (2,6), (3,5), (4,4), (6,3), and (9,2) are all points on the curve.] 3

ECO 4554: Economics of State and Local Government Study/Test Questions: Topic 2

$ 7 6 5 Median Voter’s Tax Price

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Median Voter’s MB

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Expenditure 9 per pupil