Assignments and Exams - Public Econ 1480

# Assignments and Exams - Public Econ 1480 - Economics 1480...

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Economics 1480 – spring 2010 final exam – ANSWER KEY 24 points for each problem Directions: Please place your final answer in the space provided below. Partial credit will be given in problems C, D, and E for work that is both carefully done and legible. Good luck! Problem A : Congress is composed of representatives from three states and is considering funding the following three projects: Project 1 provides benefits of \$180 to state 1 and costs \$300 in total, with each state paying \$100. Project 2 provides benefits of \$180 to state 2 and costs \$300 in total, with each state paying \$100. Project 3 provides benefits of \$180 to state 3 and costs \$300 in total, with each state paying \$100. Are the following statements true or false? Note that each state earns a net benefit of \$80 if its own project passes (the \$180 received in benefits minus the \$100 they have to pay to fund their own project). For every other state’s project that passes, a state simply bears a \$100 cost (i.e., -100 in benefits). Which states would support a plan to fund projects 1 and 2? State 1 would net +80 - 100 = -20 < 0, so they would not support it; they would rather see the bill not pass (netting 0) than see it pass (and net -20). State 2 is in the same situation and would rather the bill not pass. State 3 would simply bear 200 in costs: -100 - 100 = -200 < 0. Nobody would support this plan, so there exists no equilibrium funding these two projects. Which states would support a plan to fund all 3 projects? State 1 would net +80 - 100 - 100 = -120 < 0, so they would be better off if the bill failed. Similarly, each other district would net -120 under this plan. Therefore, nobody would support this plan either. Statement True False There is a logrolling equilibrium in which projects 1 and 2 are funded FALSE There is a logrolling equilibrium in which all 3 projects are funded FALSE

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Suppose now that there are per-state spillover benefits equal to \$50 for each project. That is, in addition to project 1 providing benefits of \$180 to state 1, it also provides a benefit of \$50 to state 2 and a benefit of \$50 to state 3. Similarly, project 2 provides a spillover benefit of \$50 to state 1 and \$50 to state 3, and project 3 provides a spillover benefit of \$50 to state 1 and \$50 to state 2. Note that the direct benefit of \$180 is unchanged for each of the projects and also that the costs of \$100 per state per project are unchanged. Are the following statements true or false? Now, each state earns a net benefit of \$80 if its own project passes (= \$180 – \$100). For every other state’s project that passes, an individual state bears a \$100 cost but reaps a spillover benefit of \$50 – in total, the cost is \$50 (or a net benefit is -\$50). Which states would support a plan to fund projects 1 and 2?
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## This note was uploaded on 07/22/2010 for the course ECON 1480 taught by Professor Knight during the Spring '10 term at Brown.

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Assignments and Exams - Public Econ 1480 - Economics 1480...

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