PrepTest 156, Section 2, Question 20
Economist: When national governments dispense funds to local(59 more words not shown)
Which one of the following(11 more words not shown)
- AA large company(33 more words not shown)
- BA national government(33 more words not shown)
- CA sales manager(39 more words not shown)
- DPeople pool their(46 more words not shown)
- ESeveral communities band(33 more words not shown)
Reading the argument
Why would a local government turn down a chance to get more money from the shared pot? If creating more projects wins a larger share, each government has a reason to keep adding projects—even when it would be more restrained if it had to pay the whole bill itself.
Imagine one community expanding its project list while its neighbor doesn't. The first gets more national money. The neighbor now has an incentive to expand its list too, rather than keep paying into a system that sends more money elsewhere. Those individually attractive choices add up to more projects and greater overall spending.
I might question whether greater spending necessarily means higher taxes; borrowing is another possible way to finance it. But this question asks us to match the proposition the economist illustrates. That financing objection isn't the pattern we need to match.
What we’re looking for
Look for a reward for outperforming others that pushes everyone toward behavior with a bad result for the group. The incentive makes sense from each participant's perspective, but the combined response makes the system work worse.
Working the answers
- A
The smaller companies cooperate to afford technology that lets them compete with the large company. We don't have a rule rewarding each participant for doing more than the other participants, followed by a worse outcome for the group. Pooling resources to gain a capability is different from the spending race among local governments.
- B
The irrigation project helps local consumers and hurts other farmers through lower prices. That is a benefit for one group with a cost for another. But there's no contest that encourages each participant to increase activity in order to claim a larger reward. The national-government subject matter doesn't make the reasoning parallel.
- CCorrect
The prize rewards the salesperson who sells the most, just as the funding system rewards a government for creating more projects than others. I might initially expect the salespeople to chase lots of cheap packs of gum rather than a few expensive items. The answer instead gives another way to win: cut prices to undercut each other.
Each salesperson has a reason to join that competition, but the combined price cutting reduces profits. That matches the original's group cost from individually rewarded behavior: more projects increase overall spending and taxation; more competition for sales volume lowers overall profits.
- D
Buying in bulk backfires in the limited sense that people eat more and lose the hoped-for savings. But no one earns a bigger reward by outperforming the other buyers. They also end up spending the same amount rather than producing the original's increase in overall spending. 'Something didn't work as hoped' is too broad a match.
- E
The communities fight over which one will receive a single center's benefits. That conflict threatens a shared project, but it doesn't reproduce a system rewarding each community for generating more activity than the others. We need the incentive that produces excessive projects or damaging sales competition, not merely a disagreement among self-interested participants.
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