MegaCable and Acme are competing for an exclusive contract to provide the city of Dustin with cable television for the next year. The firm that wins the contract will earn an economic profit of $5 million. The contact will be awarded to the firm that spends the most on lobbying. If both firms spend the same amount on lobbying, then the winner will be determined by a coin flip, so each will have a 50 percent chance of winning.
The socially optimal amount for each firm to spend on lobbying is ________.

Question

MegaCable and Acme are competing for an exclusive contract to provide the city of Dustin with cable television for the next year. The firm that wins the contract will earn an economic profit of $5 million. The contact will be awarded to the firm that spends the most on lobbying. If both firms spend the same amount on lobbying, then the winner will be determined by a coin flip, so each will have a 50 percent chance of winning.  
The socially optimal amount for each firm to spend on lobbying is ________.

Quizplus · Accepted Answer

Although the money a firm spends on lobbying may increase the firm's chances of winning the contact, spending on lobbying does not increase total economic surplus. In fact, spending on lobbying decreases total economic surplus because the value of the contact is $5 million regardless of how much is spent on lobbying.

MegaCable and Acme Are Competing for an Exclusive Contract to Provide