Chapter 17 – Asymmetric Information, Voting, and Public Choice
17-1
CHAPTER 17
Asymmetric Information, Voting, and Public Choice
A. Short-Answer, Essays, and Problems
1. What are information problems affecting sellers? Give an example that illustrates how these types of
problems are resolved.
2. Why would the establishment of a system of weights and measures and inspections by government help
market function? Discuss in terms of the market for gasoline.
3. What actions has government taken to improve buyer information in the market for surgery?
4. What is meant by the term “moral hazard”? What is an example of a moral hazard problem?
5. What potential economic problem can arise with a guaranteed payment contract for professional athletes
that is not related to performance?
6. Explain the problem of adverse selection. How might this problem affect transactions in the insurance
industry?
7. (Consider This) Why does a new car lose substantial market value when it is purchased, but a new car left on
the car dealer lot still retains its market value?
8. Why is workplace safety often an information failure? Explain.
9. “Business will always choose the least safe work environment to cut costs.” Evaluate.
10. How have firms and organizations devised ways to overcome information problems without government
intervention? Give three examples.
11. What are the basic differences between public choice theory and the economics of taxation?
12. Why may majority voting produce economically inefficient outcomes? Give a numerical example that
leads to the rejection of a public good.
13. Why does the private market succeed in meeting consumers’ demands while majority voting in many cases
fails to do the same?
14. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
More police protection
1
2
3
More fire protection
3
1
2
More schools
2
3
1
(a) What will be the choice between more police protection and more fire protection?
(b) What will be the choice between more schools and more police protection?
(c) What will be the choice between more fire protection and more schools?
(d) What do the rankings in the table indicate about choices made under majority rule?
Chapter 17 – Asymmetric Information, Voting, and Public Choice
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15. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
New park
1
2
3
New bridge
3
1
2
New school
2
3
1
(a) What will be the choice between a new park and a new bridge?
(b) What will be the choice between a new school and a new park?
(c) What will be the choice between a new bridge and a new school?
(d) What do the rankings in the table indicate about choices made under majority rule?
16. Explain two ways inefficiencies associated with majority voting may get resolved.
17. “Political logrolling solves the problem of inefficient outcomes in the provision of public goods.”
Evaluate.
18. Explain the paradox of voting that is illustrated in the table below in choices between the same expenditure
on three different public goods. The numbers under each name indicate the voting preferences (first,
second, or third choice) of each of the three citizens in the society.
Public good
Hickory
Dickory
Dock
Hospital
1
2
3
Roads
3
1
2
Police
2
3
1
19. What is the median-voter model and what are two implications from it?
20. If the political system follows the median voter model, why will many people likely still be dissatisfied by
the extent of government involvement? What do some people do to remedy this?
21. Three people on a city council have three different spending proposals for snow removal. Mitchell wants
to spend $2 million to purchase more trucks and equipment. Williams wants to spend $1 million and
purchase half the equipment. Symmes doesn’t want to purchase any new equipment, but prefers to spend
$200,000 for additional stocks of de-icing chemicals. What does the median-voter model suggest will
happen in this case? Explain the likely outcome.
22. Suppose a town is considering either providing a tax break to suburban businesses in the city or to provide
public health care in an effort to promote growth in the city. Assume there are 5 people living in the city:
Jack, Richard, Marie, Susan, and Lewis. Their willingness to pay for the policies is summarized in the
table below.
Public Good
Jack
Richard
Marie
Susan
Vickie
Lewis
Tax breaks to suburban
businesses
$100
$650
$500
$50
$75
$100
Public health care
250
50
100
600
700
350
(a) Which policy would have the greatest gain for the town’s citizens?
(b) Suppose that Richard and Marie, the two businesspersons of the town, have been closely following this
debate and decide to lobby for the tax break, as they stand to make significant gains from the policy.
To further cement their effort, they make contributions to key city council persons’ campaign funds
and in the end, they are able to get the tax breaks passed. What effect does this have on the total
benefit for Richard and Marie? For the community as a whole?
(c) What type of government failure does this example illustrate?
Chapter 17 – Asymmetric Information, Voting, and Public Choice
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23. What is meant by the term government failure as described in this chapter?
24. Describe five major sources of government failure.
25. Explain the principal–agent problem in business.
26. Explain the principal–agent problem for representative democracy.
27. (Consider This) Describe the collective action problem as it applies to mohair.
28. Explain the special-interest effect.
29. Define “earmarks” and give an example.
30. Describe how rent-seeking behavior works.
31. Compare the special-interest effect with rent-seeking.
32. Give three different examples of rent-seeking behavior.
33. Discuss the problem of clear benefits and hidden costs related to government programs. Why can it result
in inefficiency?
34. How do limited and bundled choice contribute to government inefficiency?
35. Why would private business be considered more efficient than public agencies?
36. How does corruption contribute to government failure?
37. Why are the public sector and private sectors “imperfect institutions”?
38. (Last Word) Give three examples of “government failure” in the news.
39. (Last Word) Give at least two examples of recent government earmarks.
40. (Last Word) Using your knowledge gained from this chapter, briefly explain why government “pork” is
created, even when the government spending appears ridiculous.
Chapter 17 – Asymmetric Information, Voting, and Public Choice
B. Answers to Short-Answer, Essays, and Problems
1. What are information problems affecting sellers? Give an example that illustrates how these types of
problems are resolved.
2. Why would the establishment of a system of weights and measures and inspections by government help
market function? Discuss in terms of the market for gasoline.
3. What actions has government taken to improve buyer information in the market for surgery?
4. What is meant by the term “moral hazard”? What is an example of a moral hazard problem?
5. What potential economic problem can arise with a guaranteed payment contract for professional athletes
that is not related to performance?
Chapter 17 – Asymmetric Information, Voting, and Public Choice
6. Explain the problem of adverse selection. How might this problem affect transactions in the insurance
industry?
7. (Consider This) Why does a new car lose substantial market value when it is purchased, but a new car left on
the car dealer lot still retains its market value?
8. Why is workplace safety often an information failure? Explain.
Workplace safety is often an information failure because there is inadequate information about employers
for workers. If workers do not know that certain occupations or workplaces are less safe than others, they
are at a disadvantage when they apply for a job. Without accurate information about employers (the buyers
of labor), workers (the sellers of labor) will not demand higher wages to compensate them for working at
jobs that are not as safe as other jobs. This situation is a market failure involving asymmetric information
9. “Business will always choose the least safe work environment to cut costs.” Evaluate.
This statement is not completely correct. Lack of safety in the workplace actually costs businesses money.
These extra costs take the form of production disruption caused by job accidents, reduced recruiting costs,
greater ability to retain workers and lower the insurance premiums. Especially in the case of competitive
markets and a fully informed labor force, firms will have to increase work safety to attract workers.
Chapter 17 – Asymmetric Information, Voting, and Public Choice
17-6
10. How have firms and organizations devised ways to overcome information problems without government
intervention? Give three examples.
11. What are the basic differences between public choice theory and the economics of taxation?
12. Why may majority voting produce economically inefficient outcomes? Give a numerical example that
leads to the rejection of a public good.
13. Why does the private market succeed in meeting consumers’ demands while majority voting in many cases
fails to do the same?
14. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
More police protection
1
2
3
More fire protection
3
1
2
More schools
2
3
1
(a) What will be the choice between more police protection and more fire protection?
Chapter 17 – Asymmetric Information, Voting, and Public Choice
(b) What will be the choice between more schools and more police protection?
(c) What will be the choice between more fire protection and more schools?
(d) What do the rankings in the table indicate about choices made under majority rule?
15. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
New park
1
2
3
New bridge
3
1
2
New school
2
3
1
(a) What will be the choice between a new park and a new bridge?
(b) What will be the choice between a new school and a new park?
(c) What will be the choice between a new bridge and a new school?
(d) What do the rankings in the table indicate about choices made under majority rule?
16. Explain two ways inefficiencies associated with majority voting may get resolved.
17. “Political logrolling solves the problem of inefficient outcomes in the provision of public goods.”
Evaluate.
Chapter 17 – Asymmetric Information, Voting, and Public Choice
18. Explain the paradox of voting that is illustrated in the table below in choices between the same expenditure
on three different public goods. The numbers under each name indicate the voting preferences (first,
second, or third choice) of each of the three citizens in the society.
19. What is the median-voter model and what are two implications from it?
20. If the political system follows the median voter model, why will many people likely still be dissatisfied by
the extent of government involvement? What do some people do to remedy this?
21. Three people on a city council have three different spending proposals for snow removal. Mitchell wants
to spend $2 million to purchase more trucks and equipment. Williams wants to spend $1 million and
purchase half the equipment. Symmes doesn’t want to purchase any new equipment, but prefers to spend
$200,000 for additional stocks of de-icing chemicals. What does the median-voter model suggest will
happen in this case? Explain the likely outcome.
Chapter 17 – Asymmetric Information, Voting, and Public Choice
17-9
22. Suppose a town is considering either providing a tax break to suburban businesses in the city or to provide
public health care in an effort to promote growth in the city. Assume there are 5 people living in the city:
Jack, Richard, Marie, Susan, and Lewis. Their willingness to pay for the policies is summarized in the
table below.
Public Good
Jack
Richard
Marie
Susan
Vickie
Lewis
Tax breaks to suburban
businesses
$100
$650
$500
$50
$75
$100
Public health care
250
50
100
600
700
350
(a) Which policy would have the greatest gain for the town’s citizens?
(b) Suppose that Richard and Marie, the two businesspersons of the town, have been closely following this
debate and decide to lobby for the tax break, as they stand to make significant gains from the policy.
To further cement their effort, they make contributions to key city council persons’ campaign funds
and in the end, they are able to get the tax breaks passed. What effect does this have on the total
benefit for Richard and Marie? For the community as a whole?
(c) What type of government failure does this example illustrate?
23. What is meant by the term government failure as described in this chapter?
24. Describe five major sources of government failure.
Chapter 17 – Asymmetric Information, Voting, and Public Choice
25. Explain the principal–agent problem in business.
26. Explain the principal–agent problem for representative democracy.
27. (Consider This) Describe the collective action problem as it applies to mohair.
28. Explain the special-interest effect.
29. Define “earmarks” and give an example.
30. Describe how rent-seeking behavior works.
Chapter 17 – Asymmetric Information, Voting, and Public Choice
367]
31. Compare the special-interest effect with rent-seeking.
32. Give three different examples of rent-seeking behavior.
33. Discuss the problem of clear benefits and hidden costs related to government programs. Why can it result
in inefficiency?
34. How do limited and bundled choice contribute to government inefficiency?
35. Why would private business be considered more efficient than public agencies?
Chapter 17 – Asymmetric Information, Voting, and Public Choice
36. How does corruption contribute to government failure?
37. Why are the public sector and private sectors “imperfect institutions”?
38. (Last Word) Give three examples of “government failure” in the news.
39. (Last Word) Give at least two examples of recent government earmarks.
40. (Last Word) Using your knowledge gained from this chapter, briefly explain why government “pork” is
created, even when the government spending appears ridiculous.