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Chapter_06_v2 - Part 2 Public Expenditure Public Goods and...

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Part 2 – Public Expenditure: Public Goods and Externalities Chapter 6 – Political Economy 1. a. Below, the preferences for each person. b. C wins in every pair wise 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 transportation bill will pass because it contains projects sought by so many different lawmakers is consistent with the logrolling model. It could be the case that each lawmaker has inserted favored projects with the understanding that other lawmakers will support the overall package provided it contains the projects they favor. 3. a. Neither issue would pass with majority voting as in both cases, two voters of the three would vote against the each issue because they receive negative net benefits. This is not efficient because issue X has a positive total net benefit and should be funded. b. With logrolling, voters A and B can trade votes. A will vote for issue Y if B votes for issue X, but C will not vote for either project. Both issues will pass with two votes for and one against. This is not efficient because issue Y has a negative total net benefit. c. If side payments were allowed A could pay B to vote for issue X (A would not pay C because C would require a higher payment than B), and B could pay A or C to vote for issue Y. This would result in the same inefficient outcome as in b. 1 2 3 4 A B C D Person 1 Person 2 Person 3 Person 4 Person 5
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Chapter 6 – Political Economy d. If side payments were allowed A would have to pay B at least 1 to vote for issue X. A would only be willing to pay less than 6. B would have to pay A or C at least 3, but no more than 4 to entice him to vote for issue Y.
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