Australia has relatively low rates of corruption among the government and public officials. According to Transparency International, it ranks 11th out of 180 countries for the least perceived corruption. Although the score is quite good, Australia, alongside Mongolia, has been labeled a “Significant Decliner” after dropping from the 4th to the 11th place.https://www.transparency.org/en/news/cpi-2020-asia-pacific

You have been called on by the government to explain corruption through the lens of economic theory. In your answers explicitly list the assumptions that you are making, if any. What market analysis tools and equilibrium concepts that you have learned in the class are most useful to represent the corruptive interaction between an entrepreneur and a politician and analyze when corruption occurs in equilibrium?

Start with a simple set-up where the only participants in the corruption are the entrepreneur and the politician. The entrepreneur can either give a bribe to the politician or not. The bribe is a cost to the entrepreneur but if accepted by the politician it allows them to charge a monopoly price allowing a higher profit. After receiving a bribe, the politician can accept or reject it (but they cannot prove that they got the bribe).

Use a graph and words to explain the payoff conditions under which corruption occurs. Precisely describe the equilibrium and the method that you are using to arrive at it.

Now, consider how the analysis changes if there is a citizen who experiences negative externality when corruption occurs. Assume that the citizen can punish corruption at no cost to themselves by either not electing the politician for the next term or by not buying the products produced by the corrupt entrepreneur. The citizen can only punish the politician or only punish the entrepreneur. Assume that if the citizen punishes the politician there is no effect on the payoff of the entrepreneur and that if the citizen punishes the entrepreneur there is no effect on the payoff of the politician. Identify the conditions on the size of payoffs that are necessary to prevent corruption in these two cases (i.e., when the citizen punishes the politician only and when the citizen punishes the entrepreneur only).

Assume that if the citizen does not punish, the payoffs are such that corruption occurs. Use both graphical illustration and words to explain your answer in each of the cases. Finish your answer by precisely describing all the equilibria in each of the scenarios.

Now assume that corruption does not affect the citizen and that punishing either the politician or the entrepreneur would deter each one of them from corruption but is costly to the citizen. Finish your answer by precisely describing all the equilibria. Use both graphical illustration and verbal explanation of your answer.

Summarize the two key conditions on the size of the payoffs to guarantee that the corruption does not take place in the set-up with an entrepreneur, a politician, and a citizen as players?

PART B

Using only the concepts we learned in class, explain how herd immunity of vaccinations creates a market inefficiency and how the government could intervene to achieve a socially efficient outcome. Use a fully labeled graph and verbal explanation in your answer and assume that the market for vaccines is perfect competition.