Practice

Free response question

Microeconomics · Hard · 30 marks

IEO past paper: 2018 International Economics Olympiad, open questions

A situation where a government official uses his position to acquire illicit benefit is called corruption. Corruption is a big problem in many countries and governments design different policies to curb it. According to one of the proposed policies (sometimes called the Basu proposal, after Basu, 2011), the government should make it legal to give bribes and severely punish only bribe-takers.

(a)Explain the logic behind this proposal: why may it work?[10](b)Suppose Alice and Beatrice are trying to pass a test to get the driver's licenses. Alice is a good driver. However, Beatrice is a hazard to other drivers and is about to fail the test. The examiner is corrupt and tries to maximize his revenue from bribes. How might implementing the Basu proposal affect Alice and Beatrice?[10](c)Generalise the example above: for what class of bribes can the Basu proposal be an efficient policy?[10]

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