THE UNIVERSITY OF CHICAGO

Booth School of Business

The Firm and the Non-Market Environment
BUS 33305 Spring 2012
Final Examination

EXAM DURATION: 2 hours (150 minutes)

TOTAL NUMBER OF POINTS: 80

RULES:

1) This is a close book exam. You CANNOT consult any of the course material while
completing this exam.
2) This is an individual exam. You CANNOT communicate with anyone while completing
this exam.
3) You cannot talk with anyone about this exam until 1 pm on Saturday June 9.

You need to adhere to the Chicago Booths Honor Code pledge; please include the
following pledge at the beginning of your exam:

Pledge of Honor:
I pledge my honor that I have not violated the Honor Code of Chicago Booth during this
examination.
____________________________________________
(PRINT YOUR NAME)
Q1 (8 points)
Private Prison Corporation Offers Cash In Exchange For State Prisons
Chris Kirkham, Huffington Post, February 14 2012 (abbreviated)

As state governments wrestle with massive budget shortfalls, a Wall Street giant is offering a
solution: cash in exchange for state property. Prisons, to be exact.

Corrections Corporation of America, the nation's largest operator of for-profit prisons, has sent
letters recently to 48 states offering to buy up their prisons as a remedy for "challenging
corrections budgets." In exchange, the company is asking for a 20-year management contract,
plus an assurance that the prison would remain at least 90 percent full, according to a copy of the
letter obtained by The Huffington Post.

The move reflects a significant shift in strategy for the private prison industry, which until now
has mainly expanded by managing state-controlled prisons. It also represents an unprecedented
bid for more control of state prison systems.

Corrections Corporation has been a swiftly growing business, with revenues expanding more
than fivefold since the mid-1990s. The company capitalized on the expansion of state prison
systems in the '80s and '90s at the height of the so-called 'war on drugs,' contracting with state
governments to manage new prisons to house an influx of drug offenders. During the past 10
years, it has found new opportunity in the business of locking up undocumented immigrants, as
the federal government has contracted with private companies in an aggressive immigrant-
detention campaign.

And Corrections Corporation's offer of $250 million toward purchasing existing state prisons is
yet another avenue for potential growth. The company has billed the "corrections investment
initiative" as a convenient option for states in need of fresh revenue streams: The state benefits
from a one-time infusion of cash, while the prison corporation wins a new long-term contract. In
addition, supporters of prison privatization have argued that states can achieve cost savings
through outsourcing, as prison corporations give fewer benefits to employees.

"We believe this comes at a timely and helpful juncture and hope you will share our belief in the
benefits of the purchase-and-manage model," reads the letter from Harley Lappin, CCA's chief
corrections officer, who was a former director of the Federal Bureau of Prisons.

Ohio sold off one of its largest prisons to Corrections Corporation last year as a way to plug
holes in its budget, and government officials estimate that outsourcing the prison could save the
state $3 million annually. Louisiana Gov. Bobby Jindal (R) proposed putting three state prisons
on the block last year to generate one-time revenue, but he failed to persuade state lawmakers to
endorse the plan.
a. Consider the following range of goods and services: garbage collection, fire, road repair,
libraries, prisons, and AirForce One. Rank them from the most socially desirable to least
socially desirable being provided by the public sector, and make a cutoff between the
public and private sector. Make sure to explain the rationale(s) you used to assess public
or private sector responsibility. (3 points)
Public
AirForceOne: matter of national security.
Prisons: problem of possible misaligned incentives between private companies managing
prisons and political constituencies and representatives (number of inmates, length of
imprisonment, overall crime legislation)
Fire fighters: involves externalities. It is dangerous to leave fires spread anytime this
happens in a property which has not paid for fire fighters (if A subscribe a fire fighters
deal with a company and B whose house is contiguous to As one does not, what happens
if a fire developed in As place affect Bs? It is dangerous not to extinguish it, it can
spread further).
Public/ Private
Libraries: it may not be profitable for a private to establish a library by itself, but often
private libraries are created by other institutions such as school, universities, museums,
hospitals. Difference in urban vs rural contexts as the number of users might be very
different. We might still think that there is a benefit for the whole community from having
a library. Technology (internet for example) might make the existence of public libraries
less necessary and at the same time the costs to manage one much smaller.
Private
Road Repair: no reasons why it should not be performed by private companies. It should
however probably be regulated, i.e. the decision of when to intervene should be publicly
taken, but no need to have a public company executing the work.
Garbage collection: even stronger reason than road repair. Regulation on waste disposal
and so on might be needed, but no reason why only a public company might perform the
task.
b. Compare the public-private-partnership format where the private company manages a
prison but the state retains ownership of the prison to the newly emerging format (as
discussed in the article) where the private company both owns and manages the prison. In
particular, compare them in terms of: 1) expected competitiveness of the bidding process,
2) expected likelihood for opportunistic behavior; 3) expected social welfare gains and 4)
expected profitability. (5 points)
Bidding process: likely to be more competitive if the private company both owns and
manages the prisons. The deal might appear more profitable. Possibility also to argue
that ownership is a burden and not an advantage. I disagree as the article show that this
 greater profitability might come also from the possible benefits of being able to influence
the political process in favor of prison managers.
Opportunistic behavior: higher from the private company under full management and
ownership as once the contracts are signed they might have incentive to reduce quality of
the service and, given high switching costs, it would be harder for the state to suddenly
shift operator. It can be also a reasonable explanation to say that it is higher from the
state under the PPP as the state itself might not respect contractual agreement fully,
therefore reducing the profitability of the business for the managing company once the
contract has been established (similar to an hold up issue).
Social welfare gains: Higher in PPP. There are losses from a full private management.
(1) Private companies will influence the political agenda and use the switching costs as
bargaining power to obtain their most desired outcome. (2) Establishing contractual
hard requirements (such as 90% constant occupation of prisons) might lock the political
process even stronger and impede an adaptation to changing crime or social conditions.
Both these facts might reduce social welfare more than the gains in term of profitability
of prisons themselves (saved money) increase it.
Q2 (9 points)

The passage of SB1070, Arizonas hardline immigration bill, three years ago was the impetus for
a campaign by various activist groups against for profit-prisons. A key trigger for this campaign
was evidence of the involvement of the Corrections Corporation of America, one of the largest
private prison companies in the U.S., in this controversial law, which allows Arizona law
enforcement to stop and detain anyone suspected of being an undocumented immigrant. Since
SB1070 was passed, similar laws have been proposed across the country and implemented, most
recently, in states such as Georgia and Alabama. A number of organizations have coalesced
around the campaign, including branches of the Occupy movement, immigrant rights
organizations and criminal justice organizations.

a. Assess the likely success of an activist campaign (private politics) against for-profit
prisons. Make sure to refer to both the public protest framework and media coverage
framework developed in class in making this assessment. (4 points)

Public protest framework: no presence of substitutes so the only action is probably

limited to public protest as it is difficult to damage the Corrections Corporations directly
(cannot boycott it for example).
As far as the possible media coverage aspect: likely to be high as there is an high interest
in the issues concerning prisons both from conservative citizens, worried about the
correctional system being soft, and from liberals, worried that prison do not produce
results and often facilitate violation of civil rights. At the same time, the societal
importance of the issue is high for both costs aspects as well as for being a generally hot
political topic. Overall the likelihood of a direct activist campaign is low, but it can be
successful in raising awareness and inducing officials to take stand.
 b. Several unions representing prison guards and prison employees have joined the
organizations campaigning against for-profit prisons. Why do you think that is? (2 points)

The private management has cut salaries and benefits in an attempt to reduce costs.

c. As the owner/manager of a for-profit prison, how would you respond to this campaign?
(3 points)

Make clear potential gains from private management and use workers protest as the
clear evidence that there have been savings attempts and that waste of public resources
would therefore be limited with private management.
Claim no involvement in political issues (denounce the propagandistic exploitation of the
issue). Show how wonderful and modern the newly managed private prisons are
compared to the old inhuman badly managed public ones.
Lobby representatives especially whenever not related to prison workers unions and if in
favor of reduction in public spending.

Q3 (10 points)
a. How would a plaintiff establish the existence of a tying arrangement, and under what
laws may tying arrangements be challenged? (2 points)
Laws: Section 1 Sherman
Rules: Establish that tying and tied products are different ones; there is sufficient market
power from the company forcing the tie, the overall market for such products is
substantially affected.
b. Molly runs the best dog grooming shop in town. All the dogs love her as do the owners.
She is particularly popular because of a special type of dog biscuit she gives for treats
that provides such energy that owners have been known to try them too. Slowly but
surely all the other dog grooming shops start to go out of business. Molly claims
surprised when one day she is charged with unlawfully monopolizing the dog grooming
business. What would be her best defense? (2 points)
There was no intent to monopolize the market. The monopoly in which Molly ends up
being is solely due to a competitive / productive advantage due to the better quality of her
service.
c. What is the law towards parallel business behavior? Assume for example, that three firms
charge identical prices for a product and it is agreed by all observers that the price is
unusually high compared to costs. Would this alone constitute a Sherman Act offense? (2
points)
No, unless there is proof of collusive behavior and intention to commonly fixing prices.
 d. In what ways do conglomerate mergers merit the attention of antitrust authorities? Would
the US and EU authorities have different views? If so, why and what would be the
welfare consequences? (4 points)
Such mergers may restrict competition (see GE / Honeywell case). The EU is more prone
to support competition per se while the US authorities tend to have also a closer look on
the effect on consumers (i.e. efficiency gains and lower price from merged companies).
Welfare appears a direct target of the US authorities so we expect their decision to
weakly dominate European ones in terms of welfare outcomes. However one might argue
that short run price and welfare effect might not be revealing of long run consequences
while protecting competition per se might be.

Q4 (5 points)
a. The rate base of a utility company can be valued in various ways. What, if anything, is
wrong with the utility commission valuing the rate base at its value according to the stock
market and the bond market? That is, use the market value of the firm rather than, say, its
original cost of assets less depreciation. (2 points)
The value of the stock market reflects both the current situation in which the company is
and the expectation on its future profitability by investors (investors beliefs).
Therefore any regulatory change affecting the company will be reflected in the stock
price. Using the stock price as benchmark is therefore misleading and would be, in
equilibrium, uninformative. Take the following example of a company, which heavily uses
oil. Oil prices increases exogenously, the profitability of the company is reduced, stock
market goes down, the regulator look at the stock market as evidence of reduced
profitability and allows greater room in companys pricing, which induce the stock
market to go up again. However if the regulatory move is predicted there should be no
move in the first place, which would then induce no regulatory action... basically the
regulator will be responding not only to the changed structure of costs, but also would be
influenced by the same beliefs on its own action. This is what happens for Central Banks
for example when targeting interest rates and would make regulation, not impossible, but
probably harder than using other types of information.
b. Long before U.S. electricity restructuring began in the 1990s there was a recognition that
the marginal cost of producing electricity could change significantly hour to hour.
Combined with the high cost of storing electricity, this meant that the true opportunity
cost of consuming electricity also would vary constantly. For many decades economists
have argued that retail electricity prices should fluctuate accordingly - this is known as
real-time pricing (RTP). Give at least two reasons why a regulated utility company might
be slow, or even reluctant, to adopt such a pricing strategy? (3 points)
It is not profitable for the company. Charging an average price might be heavily affected
by the infrastructure required in supplying demand peaks. A RTP system would reduce
such need therefore reducing the need of very costly extra supply in peak hours.
 Moreover it would also reduce the need of capital investments whose expenditures would
be passed on to consumers in a regulated environment (see Averch-Johnson effect).

Q5 (5 points)
In a recent Slate column, Eliot Spitzer makes the case that the financial crisis and BPs
Deepwater Horizon blowout stemmed from the same type of policy mistake. In both cases, Mr
Spitzer writes, government policy socialized the risks of catastrophic failure, and then failed to
tightly regulate the risky behavior it had thereby encouraged. The remedy, Mr Spitzer argues, is
to either eliminate liability caps for business, or tightly restrict and supervise the activities it
engages in:

A regime of full tort damages and recoveries is one way to balance safety and exploration, or
investment and risk, or whatever economic activity we are discussing. But there is another way:
meaningful and vigorous oversight to impose safety standards that are dictated not by the market
for insurance but by the judgment of serious experts in a regulatory context.

One or the other of these mechanisms must be permitted to exist: exposure to full damages or
oversight by tough regulators. The absence of either spells doom. It is no wonder then, that on
Wall Street and in the Gulf we have had disaster strike. In each case, we distorted the market by
creating an incentive for riskcapping exposure for Too-Big-To-Fail institutions and oil drillers
and then defanging the regulatory agency that needed to step in to provide the balance we were
not letting the market provide.

a. Explain how liability caps interfere with social efficiency. (2 points)

They reduce the responsibility of companies as they cut off the potential distribution of
losses from above. This induces to take extra risks above what is efficient.

b. In the case of Deepwater Horizon, what constraints do you see in using a regime of full
tort damages and recoveries as a way to ensure good behavior? (3 points)

In the case of environmental damages there are two main problems: which is the right
compensation for, say, species X disappearing from the planet and to whom such
compensations should eventually go (Gulfs fishermen? Tourists who wont go any
longer as the place is now polluted?). It seems that in the case of environmental damages
a full liability regime appears unrealizable.

Q6 (14 points)

The Food and Drug Administration (FDA) approval process for drugs can take from 7 to 13
years. Most other developed countries have processes that lead to approval in a considerably
shorter time, so drugs are often available in other countries several years before they receive U.S.
approval. United States pharmaceutical manufacturers contended that they lose foreign sales
because the Food, Drug, and Cosmetics Act of 1938 prohibits the export of drugs that have not
yet been approved for sale in the United States, even though they have been approved for use in
the importing country.

Lewis A. Engman, president of the Pharmaceutical Manufacturers Association (PMA), noted that
none of the other leading drug producing countries-Japan, Switzerland, Germany, France, and
Great Britain-had such a prohibition on exports.

The Pharmaceutical Export Amendments of 1986, introduced in the Senate by Senators Orrin
Hatch (R-UT), Edward Kennedy (D-MA), and Bill Bradley (D-NI) would allow the export of
unapproved drugs to 15 "Tier One" countries that have pharmaceutical approval laws
comparable to those in the United States. Those countries include most of the European
Community countries, Japan, Australia, New Zealand, and Switzerland. Exports would be
allowed to a second set of "Tier Two" countries, designated at a later date by the Secretary of
Health and Human Services. Unapproved drugs could also be exported to other countries if there
were a demonstrated need, such as necessitated by a tropical disease. The bill also stipulated that
any drug that had been rejected by the FDA could not be exported to any country.

Senator Hatch estimated that the bill would create 8,000 to 10,000 jobs and $500 million or more
in annual exports. The Senate Labor Committee cited estimates ranging from a high of $1.76
billion in added exports and 40,000 new jobs to a low of $217 million and 2,482 new jobs.
President Ronald Reagan was eager to have the bill enacted.

The position of the FDA was stated by Deputy Director Dr. Mark Novitch:

We are sensitive to the possibility that potentially harmful drugs may be exported. If legislation
authorizing the export of unapproved drugs is enacted, we will make every effort to avoid this.
Ultimately, however, we believe that the governments of other nations are the proper authorities
to assess their own health needs, the diseases and health-related characteristics of their
populations, the nature of their health care delivery systems, the availability of treatment
alternatives, and their own assessment of risk/benefit potential.

The bill was opposed by consumer and activist groups, including Public Citizen and the Health
Research Group, both affiliated with Ralph Nader, and by Senator Howard Metzenbaum (D-
OH). Senator Metzenbaum stated that exporting unapproved drugs "would codify an immoral
double standard in our food and drug laws." He added, "The American people have a right to be
alerted to what the pharmaceutical manufacturers of the country are doing to make 'Made in
America' a dirty word throughout the world." Despite the opposition of Senator Metzenbaum,
prospects for the bill in the Senate were very good.

The House posed more of a problem than the Republican-controlled Senate. Henry Waxman (D-
CA), chairman of the House Subcommittee on Health and the Environment, opposed the bill
because of the risk that unapproved drugs would eventually find their way to developing
countries. In all likelihood, Waxman's subcommittee could block, or at least significantly delay
any bill that it found unacceptable through its ability to keep the gates closed. Conversely
because of his experience with pharmaceutical issues, Waxman recognized that any bill must
gain the support of the PMA if it were to have any chance of success in the house.

Representative Waxman had his own legislative agenda, which included the establishment of a
vaccine injury compensation program to provide direct compensation from the federal
government to individuals injured by the vaccinations required by state laws. This would be a
no-fault system, so claimants would not have to establish negligence to qualify for payments.
Vaccine manufacturers would be granted immunity from liability, but the compensation would
be financed by an excise tax on vaccine manufacturers. The pharmaceutical industry opposed the
vaccine compensation program because it could stimulate other government attempts to
intervene in the pharmaceutical market. Waxman believed that a majority of House members
would vote for this program, but President Reagan had threatened to veto it and Waxman knew
that the veto could not be overridden.

a. Which interests are affected by this issue? Which are aligned? (3 points)

(1) American drug producers

(2) Foreign drug producers

(3) Foreign consumers

(4) Activists (Nader and co).

4 and 2 are aligned d as they both do not want American companies exporting their
drugs easily, 1 can be aligned with 3 if there is a perception by 3 that the possibility of
exporting drugs before approval might be beneficial for them. Politicians are affected
too. The Sanate labor committee might be interested in supporting the bill for the
possibility of creating jobs, representives in the constituencies where there is a presence
of farmaceutical companies might also tendo to favor the bill. The Health and
Environment committee on the contrary has opposed interests.

b. Will interests be motivated by serious moral concerns about this issue? (2 points)

For the activist this might be, for all others it is a matter of business.
c. What implications do the structure and legislative process of Congress have for the
outcome of this issue? (4 points)

The institutional structure does affect the legislative process. The bill would be required
to pass in both chambers, therefore opponents may focus on the House already more
favorable to opponents interests to strike the bill down. Moreover both Senators and
Representatives are indeed affected by their constituencies as detailed above. Waxman is
key for the whole strategy, so it is important to address the issue. The vaccin issue is
connected and a good answer might define also a strategy of how the political process
might impy an exchange of favors on the two topics.
 d. What strategy should the pharmaceutical industry adopt? How should that strategy be
implemented? How likely is it to be successful? (5 points)

A public campaign expressing doubts on why it should be forbidden to do what everybody

else in the rest of the civilized world does. However it is important to be careful, too
much public exposure is dangerous as pharmaceutical companies are not usually the
most popular ones. Express concern for the loss of revenue and therefore of potential
jobs; future revenue might also be affected as foreign markets might also provide a first
screening between more and less efficient drugs (say this behind close doors otherwise
you fuel the activists moral arguments). I think such campaign is likely to be quite
effective as the moral arguments against it are weak unless people are willing to assume
that all other states act in an immoral way and pro-labor, pro-efficiency arguments are
strong and build on organized interests.

Q7 (6 points)
Laurence Summers, while Chief Economist at the World Bank, wrote a memo claiming that the
world's welfare would improve if the wastes of rich countries were sent to poor countries.

He gave four arguments for this claim which we can summarize as follows:

1. Clearly, it will be best for everyone if pollution is shipped to the country where its health
effects will have the lowest costs. The costs of "health impairing pollution" depend on the
wages lost when pollution makes people sick or kills them. So the country with the lowest
wages will be the country where the health effects of pollution will be lowest. So with
"impeccable economic logic" we can infer that it will be best for everyone if we dump our
toxic wastes in the lowest wage countries.
2. Adding more pollution to an environment that is already highly polluted has worse health
effects, than putting that same pollution into a clean environment where it can disperse. So
we can reduce the harm pollution causes by transferring it out of highly polluted cities like
Los Angeles, and dumping it into countries in Africa that "are vastly under-polluted. This
will make better use of those countries' clean air quality which we now are using "vastly
inefficiently, and it will improve "world welfare."
3. The same pollution will cause more harm in a country where people have "long life-spans,"
than in a country where people die young. When people have "long life-span they survive
long enough to get diseases, like prostate cancer, that people who die young do not get. So
pollution will cause more diseases like prostate cancer in countries where people have long
lives than countries where people die young. It follows that we can reduce the diseases
pollution causes by moving it out of rich countries where people have long lives, and
dumping it into poor countries where people die young.
4. Pollution can cause "aesthetic" damage, such as dirty-looking air, that "may have very little
direct health impact. Since the wealthy are willing to pay more for clean-looking air than the
poor, clean looking air is worth more to the wealthy than to the poor. So it should be possible
for people in wealthy countries to find people in poor countries who are willing to trade their
 clean air for the money the wealthy are willing to offer. This kind of trade will be "welfare
enhancing" for both parties.

a. Explain which parts of the reasoning in this memo a utilitarian would have to accept and
which parts a utilitarian could reject. (3 points)

Point 1 might be the only one a utilitarian could reject on the basis that the wage of a
person does not represent the value of a persons life (the utility she/he gets from being
alive and well, e.g. if I am sick I might not only work less but also enjoy leisure less). The
others all have to be accepted as they all increase the general efficiency, which means
that the sum of peoples utilities in the world would also be bigger.

Assuming the four arguments are correct, do you agree or disagree with the conclusion
that those in rich countries should ship their wastes to poor countries (perhaps by paying
poor countries to take them)? Explain why or why not. (3 points)
Any argument is fine here provided that there is coherence between the theoretical
framework and the conclusions.

Q8 (3 points)

Some of the remaining debate over the efficacy of seat belt requirements and the influence of the
counterproductive effect of decreased driver precautions noted by Peltzman stems from the
crudeness of the empirical information that is available. If we can only look at accident rate
totals by year or by state, then much key information will be lost. If you had unlimited resources
and could commission your state police to develop an empirical database for you, what factors
would you ask them to assess so that you could test the Peltzman effect conclusively?

Need to have data on all possible driving habits with and without seat belts, need to have
data to check for a selection effects (i.e. people not using the seat belt might be inherently
more likely to drive slower or faster and so on). Obviously the more comprehensive the
better (data on cars and so on are important when assesing accidents).
Q9 (9 points)
a. State two conditions under which an environmental economist might not recommend an
emissions trading program as an attractive environmental policy instrument. Explain your
reasoning in each case. (3 points)

There might be uncertainty on the number of permits to put on the market; also, the
structure of the market might tend to reduce the efficacy of permits in reducing pollution.
Firms may collude. Policy delays in adjusting standards combined with the assumption
that mitigation costs might be more elastic in the short run (which might be motivated by
the fact that oil is highly storable and this effect might dominate on the effect due to
 higher long run elasticity induced by the necessary fixed investments to move to greener
energy) might favor taxes over cap-and-trade.
b. Two general approaches to addressing the threat of global climate change are CO2
emissions reductions (carbon abatement) and CO2 removal through forest expansion
(carbon sequestration). Several analyses have estimated the costs of these two
approaches, and have found that for the United States, the marginal cost functions of both
approaches come from the origin (0,0), and are slightly non-linear with increasing slope.
The analyses have also found that the carbon sequestration marginal cost function lies
everywhere above the carbon abatement marginal cost function, except at the origin,
where they coincide.

On a graph, draw both marginal cost functions, and show how you would identify the
cost effective portfolio (quantities of carbon reduction from each strategy) for a total 1-
million ton carbon reduction target. What does this tell you about the cost-effective
portfolio of CO2 policies for the United States? Will the cost-effective portfolio include
only abatement, only sequestration, or both? Explain. (3 points)

It will include both. Equalized marginal costs at last unit of reduction. See picture in
slides.

c. Define a hybrid, or safety-valve, policy emission trading system, and describe one
advantage and one disadvantage of this system. (3 points)

A hybrid system is a cap and trade system where the maximum, minimum, or both prices
are capped. Permits can be bought either in the market or from the government at a
given price which might be adjusted over time. This system is a hybrid between a tax and
a cap and trade system. As expressed above, in a perfectly efficient regulatory framework
this system seems dominant as able to achieve any desired result, but in a system with
policy delays it might induce an incorrect pricing of pollution.

Q10 (3 points)

In an academic article, a researcher wrote: Quoting the value of risk reduction in terms of
statistical lives is akin to quoting the price of milk by tanker-truck load, rather than by the quart.
Explain what the author means by this statement.

People have preferences defined over small changes to mortality, not really on a full
statistical life. The value considered pertains to a reduction in the chance of death, not the
overall value of sure death. This is a normalization relying on a linearity in willingness to
pay for higher probabilities of death which might not be plausible.
Q11 (8 points)
More Money Can Beat Big Money
By Lawrence Lessig, The New York Times, November 16, 2011 (abbreviated)

Despite the founders intentions, Congress has evolved from a dependency upon the people, to
an increasing dependency upon the funders. Members spend 30 percent to 70 percent of their
time raising money to stay in Congress, or to get their party back in power. Less than 1 percent
of Americans give more than $200 in a political campaign. No more than .05 percent give the
maximum in any Congressional campaign. A career focused on the 1 percent or, worse, the
.05 percent will never earn them the confidence of the 99 percent. Indeed, according to a
recent New York Times/CBS News poll, so far it hasnt earned them the confidence of any more
than 9 percent.

So long as elections cost money, we wont end Congresss dependence on its funders. But we
can change it. We can make the funders the people. Following Arizona, Maine and
Connecticut, we could adopt a system of small-dollar public funding for Congress.

Heres just one way: almost every voter pays at least $50 in some form of federal taxes. So
imagine a system that gave a rebate of that first $50 in the form of a democracy voucher. That
voucher could then be given to any candidate for Congress who agreed to one simple condition:
the only money that candidate would accept to finance his or her campaign would be either
democracy vouchers or contributions from citizens capped at $100. No PAC money. No
$2,500 checks. Small contributions only. And if the voter didnt use the voucher? The money
would pass to his or her party, or, if an independent, back to this public funding system.

Fifty dollars a voter is real money: more than $6 billion an election cycle. (The total raised in
2010: $1.86 billion.) Its also my money, or your money, used to support the speech that we
believe: this is not a public financing system that forces some to subsidize the speech of others.
And because a campaign would have to raise its funds from the very many, it could weaken the
power of the very few to demand costly kickbacks for their contributions what the Cato
Institute calls corporate welfare, like subsidies to ethanol manufacturers, or tariffs protecting
the domestic sugar industry. Cato estimates that in 2009, the cost of such corporate welfare was
$90 billion. If cutting the link to special interest funders could shrink that amount by just 10
percent, the investment would, across a two-year election cycle, pay for itself three times over.

Campaigns financed by the 1 percent will never earn the confidence of the 99 percent, or appear
to any of us as anything other than corrupt. We, all of us, must demand an end to that corruption.

a. Is the existence of ethanol subsidies proof of the corrupting influence of money in U.S.
politics, as implied in this opinion piece? (2 points)

It is more the effect of lobbying, not really of money itself.

b. Compare the campaign finance reform proposed by Lessig in this opinion piece to the
current U.S. campaign finance law from the perspective of utilitarianism, rights and
justice. (4 points)

Very open answer. Need a good description of the current system. May constrain people
in term of their contribution, maybe it is better that more vocal / stronger interests could
be able to pay more (Kantians might favor this in particular). May lead to a more equal
distribution of public money and may induce people to acquire more information on
policies so increasing the accountability of elected officials and being favoured by a
Rawlsian.

c. How likely is it that such a campaign finance reform would be adopted by Congress?
Discuss. (2 points)

Low to very low. Almost no organized interest would support such law.