Logical Reasoning

PT156 · S2 · Q20 Economist: When national governments dispense funds

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Economist: When national governments dispense funds to local governments to spend on local projects, any local government can receive a greater proportion of government funds by creating more local projects than other local governments create on average.

Proposition

An incentive structure rewards individual participants based on their performance relative to other participants. Each participant's rational response is to do more of the rewarded activity, beyond what they would otherwise do, in order to capture more of the reward. The aggregate result is that everyone overdoes the activity, leading to a worse collective outcome than if no incentive existed.

Evaluate

The economist describes a competitive incentive that drives participants to take more of an action than is collectively optimal — projects funded externally, where each locality gets more by doing more than other localities — and the systemic outcome is greater overall spending and taxation across the system. The right answer should mirror this dynamic: an incentive based on relative performance, individuals each ramp up their activity, leading to a worse collective outcome.

Goal

Find an answer where individuals respond to relative-performance incentives by escalating an action beyond what's collectively beneficial, producing a worse aggregate outcome.

20.

Which one of the following most closely conforms to the proposition illustrated by the economist's statements?

  1. A large company invests in

    Bad Conclusion Match

    This involves smaller companies cooperating to compete with a large company. There's no competitive escalation between equals, no relative-performance incentive driving each participant to overdo an activity, and no worse-collective-outcome punchline. The companies pool to compete more effectively, which is the opposite dynamic.

    5% picked this

  2. A national government finances an

    Bad Conclusion Match

    This describes a single project funded by a national government with regional winners and losers. There's no relative-performance incentive driving multiple parties to escalate an activity, and no aggregate worsening from competitive overuse. It's about a single intervention's distributional effects.

    8% picked this

  3. Correct

    A sales manager offers prizes

    Why this is right

    This is the structural twin. The sales manager creates a relative-performance incentive: prizes for whoever sells most. Each salesperson responds by undercutting the others' prices to capture the prize. The aggregate result is lower profits than if no incentive existed — collectively worse off, just as in the economist's scenario. Same shape: relative-performance reward → each participant escalates a particular action → aggregate worse outcome.

    Skill tested: Principle-Conform · how this choice captures the argument's function is the move to repeat next time.

    68% picked this

  4. People pool their money to

    Bad Conclusion Match

    This is about pooled buying for a discount, then eating more. The discount isn't a relative-performance reward — there's no competition between buyers to capture more by doing more than others. It's a flat volume discount. The "spending the same despite the discount" outcome is unrelated to the economist's competitive-escalation story.

    17% picked this

  5. Several communities band together to

    Bad Conclusion Match

    This describes communities fighting over where the conference center will be located. There's no relative-performance incentive driving each community to escalate an activity (e.g., building more centers); they're fighting for one fixed prize's location. The escalation in the economist's scenario is about doing more of an activity, not about disputing the location of one project.

    2% picked this

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