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Corruption has been a significant problem in Iraq. Opening and running a business in Iraq usually requires paying multiple bribes to government officials. We
Corruption has been a significant problem in Iraq. Opening and running a business in Iraq usually requires paying multiple bribes to government officials. We can think of there being a demand and supply for bribes, with the curves having the usual shapes: The demand for bribes will be downward sloping because the smaller the bribe, the more business owners will be willing to pay it. The supply of bribes will be upward sloping because the larger the bribe, the more government officials will be willing to run the risk of breaking the law by accepting the bribe. Suppose that the Iraqi government introduces a new policy to reduce corruption that raises the cost to officials of accepting bribes-perhaps by increasing the jail term for accepting a bribe. As a result, the supply curve for bribes will shift to the left. If we measure the burden on the economy from corruption by the total value of the bribes paid, what must be true of the demand for bribes if the government policy is to be effective? Illustrate your answer with a demand and supply graph. Be sure to show on your graph the areas representing the burden of corruption before and after the government policy is enacted. Source: Frank Gunter, "Corruption in Iraq: Poor Data, Questionable Policies," Working Paper, March 2009. In the figure to the right, S is the initial supply curve for bribes and D is the demand curve for bribes. The corresponding equilibrium price for bribes is initially P and the equilibrium quantity is Q. Then, the supply curve for bribes shifts to the left to S2 as the cost to officials of accepting bribes increases, as described. The new equilibrium price is P2 and the new equilibrium quantity is Q2. To answer this question, 1.) Use the rectangle drawing tool to shade in the area representing the burden of corruption before the government policy is enacted. Label this shaded area 'Corruption,'. 2.) Use the rectangle drawing tool to shade in the area representing the burden of corruption after the government policy is enacted. Label this shaded area 'Corruption2'. Price (dollars per bribe) P Q2 Q1 Quantity (bribes) S2 D G
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