Question

Question 1

Suppose that a political leader raises $1.2 billion in tax revenue. Assume that the leader can supply public goods worth $2000 to each individual in society if he spends all of his tax revenue on providing public goods. Assume also that the size of the winning coalition is 2,500.

a. If the leader were to spend all of the tax revenue on providing private goods, what would the maximum value of the private goods be for each member of the winning coalition if we assume they all receive the same amount?

b. Would the leader prefer to provide only public goods or only private goods in this situation? Why?

Now suppose that the size of the winning coalition is 850,000. Keeping everything else the same:

c. If the leader were to spend all of the tax revenue on providing private goods, what would the maximum value of private goods be for each member of the winning coalition if we assume they all receive the same amount?

d. Would the leader prefer to provide only public goods or only private goods in this situation? Why?

e. What do your answers tell you about public vs. private goods provision and the size of a leader’s winning coalition?

Answer 1

$1.2 billion= $1200000000.

If all private goods are to be provided, then each member gets

1200000000/2500=$480000. This is clearly higher than the amount of public goods so the politician prefers to provide private goods only.

When winning coalition is 850000, then each gets 1200000000/850000=$1411.76

This is lower than the amount of public goods so the politician will provide public goods in this case

Thus tells us that the larger the winning coalition is the better it is to provide public goods as even in larger coalitions, public goods can be enjoyed by everyone equally without reducing anyone else's consumption as public goods are non rival and non excludable