Public Economics

Problem Set
Public Goods and Political Economy

Susana Peralta

May 8, 2019
Problem Set Public Economics Prob set II

1. The municipality of Lisbon is considering expanding the cycling lanes in the

city. The following table gives people’s marginal valuation of the cycling
lanes, depending on their respective length.
km of lanes Everyday Bikers Occasional Bikers
1 20 18
2 19 17
3 18 15
4 17 15
5 15 14
6 13 11
7 10 8
8 8 7
10 5 3
11 3 0

(a) Take the group of everyday bikers. Is the total valuation they attach
to the lanes increasing or decreasing in the number of km built by the
municipality?
(b) Suppose that the marginal cost to build each additional km is equal to
245. There are 10 everyday bikers, and 5 occasional bikers in the city.
How many km of biking lanes should the municipality build?
(c) A new engineer hired by the municipality says that the marginal cost
above ignores a maintenance cost of 5 that has to be invested in the next
3 years. The interest rate is equal to 5%. This maintenance cost does
not depend on the length of the cycling lanes. How do you compute
the new marginal cost of the lane construction? You do not need to
compute it, just provide the computations you would make.
(d) Imagine that the municipality of Lisbon is not constructing any cy-
cling lanes. The group of 10 everyday bikers decided to build the lanes
themselves. Will there be any lane provision?
(e) Imagine that the mayor is not aware of the people’s willingness to pay
for the cycling lanes. She hires a consulting firm who runs a survey
asking people “how much would you be willing to pay for a cycling lane
in the city with x km?”, with x replaced by each possible length. If
the residents expect their local tax to depend on their answer to this
survey, would you trust its results?

2. A group of friends is deciding whether or not to pay for a paintball game.

The price of the paintball game at an adventure park nearby is 150 euros, and
it may accommodate up to 20 people. The group is composed of 10 friends
who love paintball and whose marginal willingness to pay for the game is 15

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Problem Set Public Economics Prob set II

euros. The remainder 5 friends enjoy the game only to some extent and have
a marginal willingness to pay of 10 euros.

(a) Is the paintball game a public good in this case? Discuss.

(b) Is it optimal for this group of friends to play the game?
(c) Suppose that no one is contributing for the game. Show that no indi-
vidual has an incentive to contribute in this case.
(d) Suppose that all the 10 paintball lovers are contributing 15 euros each.
Does any of them want to decrease her contribution to zero? And what
about the 5 people who simply enjoy the game? Do they want to put
some money in?
(e) Consider the situation above in each the paintball lovers pay for the
game. Is it more or less likely to arise if this would be a paintball
tournament and there would be 1000 paintball lovers involved, with the
same willingness to pay, but the cost of the tournament is now 15 000
euros?

3. In the neighbourhood of Campolide, 10 neighbours have a marginal valuation

of streetlights of v = 10 − q, where q is the quantity of street lamps. The
remaining 20 neighbours have a marginal valuation of the street lamps of
v = 20 − 3q. The marginal cost of each street lamp is equal to 80. How
many street lamps are socially optimal?
4. Fletcher (2003) shows that when congressional districts are redrawn to in-
clude more elderly peo- ple, members of Congress become more likely to
take pro-elderly positions in congressional votes. Why does the median voter
model predict that this would be so?
5. The following is extracted from the abstract of the paper “Democracy comes
to Europe: franchise extension and fiscal outcomes 18301938.”, by Toke Aidt,
Jayasri Dutta, and Elena Loukoianova. Explain, based on the median voter
result.
“This paper examines the relation between public spending and
the spread of democracy in Western Europe during the period
18301938. Our data set includes measures of the size of the elec-
torate, the election rule, and electoral participation, as well as
measures of the size and composition of central government ex-
penditures for 12 countries. We estimate panel regressions, and
find that (1) the gradual lifting of socio-economic restrictions on
the voting franchise contributed to growth in government spending
mainly by increasing spending on infrastructure and internal se-
curity; (2) the female suffrage had a weak positive effect, through
spending on health, education and welfare;”

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Problem Set Public Economics Prob set II

6. Recently, there has been a movement of youth towards persuading politicians

that more environmental protection is needed. The founder of this movement
is Greta Thunberg, a Swedish 15-year old. Is there a case for arguing that
decreasing the minimum voting age would improve the governments’ invest-
ment in environmental protection?

7. In a given country, the citizens are deciding about how much income support
for the poor should be provided. There are three equal-size groups of people:
(1) Type A people want as much social protection as possible; (2) Type B
people prefer a lot of social protection to none, but they prefer none to a
moderate sized welfare state; (3) Type C people prefer medium levels to low
levels, which they in turn prefer by a modest amount to high levels.

(a) Are all these preferences single-peaked?

(b) Is there a level of social spending which is a Condorcet winner?
(c) If you are the president of the Parliament and you represent group A,
how would you set the voting agenda?