Reference no: EM132221927

Fiscal Federalism is a system in which government programs are undertaken at different levels of government levels, such as local, state and national. Consider five regions (state of local) and five representatives denoted by A, B, C, D, and E. Assume that regions of equal size. Region A and B have a project for bridge. THe costs of the project is $100 million, and the benefits are as follows.

Bridge                                      Waterways

Benefits to A               $60 million                              0

Benefits to B               $60 million                              0

Benefits to C               0                                              30

Benefits to D               0                                              30

Benefits to E                0                                              30

We want to see if this project should be a national project. A national project will be financed by importing general tax equally on all residents in different regions. If it falls in vote, the project will become a regional project, which will be financed by involved regions.

(i) Suppose the decision is made by a simple majority vote by five representatives. Show how each region will vote by considering the costs and benefits. WOuld this project pass the vote and become a national project?

(ii) If the bridge project is decided by the involved regions, A and B, would this project pass the majority vote?

Now, consider navigable waterways project which involves regions C, D, and E. THe project costs $100. THe benefits are shown above

(iii) Would the waterways project pass the majority vote and become a national project? Show the details of voting by each representative.

(iv) Would this project pass a regional project among C, D, and E?

(v) Which project will be influenced by special interests, the bridge of the waterways? And which project is efficient?