Q2. Explain how affirmative and nega... [FREE SOLUTION]

Chapter 5: Q2. (page 114)

Explain how affirmative and negative majority votes can sometimes lead to inefficient allocations of resources to public goods. Use Figures 5.2a and 5.2b to show how society might be better off if Garcia were allowed to buy votes.

Short Answer

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If the government accepts a public good, which is not beneficial for the society, based on affirmative majority votes, the resources will be wasted on an unnecessary item. It will lead to inefficient allocation of resources.

If the government rejects a public good, which will better off the society, based on negative majority votes, it will also lead to inefficient allocation of resources.

If Garcia was allowed to buy votes, she would have purchased the other two votes for 鈥榶es鈥� in the case of the diagram 鈥渁鈥� and the society would have received a net benefit of $ 250.

In the case of the second diagram, she would have purchased the other two votes for 鈥榥o鈥� and the society would have saved itself from a negative net benefit of -$100.

Step by step solution

Explanation for inefficient allocation of resources

The government allocates resources to produce public goods according to the outcome of affirmative and negative majority voting. However, the outcome of majority voting may not always be efficient because people do not necessarily vote in the interest of their economic welfare.

Suppose affirmative majority voting accepts a good whose total cost exceeds its total benefit (majority of people have positive net benefit (benefit>cost). In that case, it will waste resources on public goods. This is shown in diagram b.

Similarly, if a good, whose total benefit is more than its total cost, is rejected through negative affirmative voting (each individual will vote according to his or her own cost and benefits, and a majority of people have a negative net benefit (cost> benefit), it will lead to a social efficiency loss. This is shown in diagram a.

Therefore, in both cases, majority voting can sometimes lead to a wrong decision of inefficient allocation of resources of the public goods.

Explanation for society’s better off if Garcia were allowed to buy votes

Consider diagram 鈥渁鈥�, Garcia is receiving benefits worth $700 by paying $300 as a cost for the public good, while the other two people have higher costs than their benefits. Thus, the majority says no even though the total benefits are greater than the total cost for society. A net benefit of $250(=1150-900) was foregone due to this negative majority voting.

If Garcia were allowed to buy votes, she would have purchased Johnson and Lee鈥檚 votes for yes in diagram a. This could have resulted in the production of the public good and a gain of $250 for the society. Thus, society would have been better off.

Similarly, according to diagram 鈥渂鈥�, Johnson and Lee have higher benefits than the cost incurred by them, i.e., $300 each, while for Garcia, this cost is higher than her benefit ($100). The majority favors the public good, and hence the resources are diverted to its production. However, society receives a negative net benefit equal to $100 (=800-900).

If Garcia was allowed to buy votes, she would have purchased Johnson and Lee鈥檚 votes for no this time. This could have saved the resources and loosing $100 overall. Thus, society would have been better off.