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Econ Ch 11
Government Failure
| Question | Answer |
|---|---|
| Government Failure | Exists when a gov fails to generate a “perfect” economic outcome. Total Social Surplus is decreased by government intervention in a market. |
| How does government failure contrast from market failure? | Gov failure focuses on the actions of the gov, and market failure is about the actions of the market. Market failure focuses on the failure caused by the insufficient level of trade that emerges from interaction between self-interested buyers and sellers. |
| What are the two main sources or classes of government failure? | Government fails to perform a necessary task efficiently (productive) or government fails to do only those tasks that it should do (allocative) |
| Productive inefficiency | Gov is producing at lowest possible cost in resources |
| Allocative inefficiency | Gov produces goods that people value more than it costs to produce them |
| Why is a government that produces either too much or too little of a public good inefficient? | The gov would be causing a surplus or a shortage by being inefficient in which they would not be achieving market equilibrium |
| What are the 7 specific causes of Government Inefficiency or Failure? I can count really really loud, dude | Informational problems, cost of compliance problems, corruption/kleptocracy, regulatory capture, rent seeking, logrolling/rational ignorance, and deadweight loss of taxation |
| Informational Problems | To make an economically efficient choice the decision maker must know the true marginal cost and marginal benefit of a decision |
| What information does government lack when making a decision about what govt. provided goods to produce? | The true marginal cost and marginal benefit |
| Economic Calculation Problem | Proposes that a system of planning can never achieve efficient outcomes precisely because the planners do not have the information generated by market transactions available to them |
| How does a market system get this information? | By observing the self-interested behavior of the participants and graphing their observations through supply and demand curves. |
| Bureaucratic Provision | All gov bureaucracies impose cost on citizens in carrying out their mandates. Some governments impose extraordinarily high costs. |
| Why do government bureaucracies fail to provide their goods efficiently? | The resources must be used to comply with government regulations |
| What is the “cost of compliance”, and how is it related to bureaucracy? | The expenditure of time or money in conforming with government requirements such as regulation due to bureaucracy. Businesses can be hard to start if the cost of compliance imposed by a bureaucracy is too high |
| Corruption or Kleptocracy | Corruption refers to gov officials deliberately making the wrong decision in order to get bribes or other forms of compensation, and kleptocracy. Is when the bribes become the norm |
| Why is corruption a problem for a country? | Corruption can involve setting aside the needs of the people because the gov is only satisfying themselves in which society suffers. |
| How does corruption cause a government to make inefficient decisions when providing govt. goods? | The gov acts for themselves and doesn’t put the people first. They may make inefficient decisions if it means that they will benefit. |
| How is kleptocracy related to crony capitalists? | Crony capitalists are business people who take advantage through the the corrupt political system. Kleptocracy is a gov that continuously advantages thru bribes rather than help the public. Relate through the corruptness and the ability to take advantage. |
| Regulatory Capture | May occur where firms in a regulated industry influence a regulatory agency to the point where the agency enacts policies that are in the best interest of the regulated firms, even if the policies are not in the best interest of the general public. |
| Who is “captured”? Who does the “capturing”? | Regulatory agencies // firms |
| What does the regulated industry do with the power achieved by capturing the government regulators? | The regulatory industry acts for itself instead of the general public; they are able to advantage themselves. |
| Rent seeking | Attempt by people to manipulate the gov in such way that they collect more than competitive levels of income. Extra income comes at expense of others. |
| Is rent seeking illegal? | No |
| Explain how peanut farmers getting the government to pass a tariff law (tax on imported peanuts) is beneficial to them but damaging to the rest of society. | It benefits them because they can charge a higher price and eliminate competition, but now society has to pay the higher price for the same peanuts that aren’t really worth the new cost. |
| Logrolling | Process of vote trading between representatives in a political system |
| Rational ignorance | Ignorance among voters as to what their reps are doing (voter is rational for being ignorant). Due to the costs of information being higher than the benefit of information, one vote cannot remove a bad rep |
| How is it possible for vote trading to lead to government in a democracy providing goods that people do not value more that they cost? | One rep may want their project to excel so they vote for another rep whom votes for him. These votes are done out of self interest- not in the interest of the public. The public may not value these goods, but there are votes anyway due to logrolling. |
| Why don’t people vote out the politicians who participate in logrolling? | The voters choose to be rationally ignorant, or they really believe that they are helping their district/state |
| How can it be rational to be ignorant of what your government representatives are doing in Washington or in various state houses? | It has high costs and low benefits to not be ignorant, so its rational to be ignorant. |
| Deadweight loss from taxes | Loss to one party without simultaneously being a gain to another party. Imposed when taxes are imposed because they reduce the size of the market for the good taxed. |
| How does a tax on an item reduce the size of the market for a good? | Taxes distort costs/benefits which alter behavior. People don’t want to buy and invest in a market with higher prices. |
| How are both consumers and producers hurt by the tax? | Consumers have to pay more to the government in which they won’t so producers won’t have buyers and the producers have to pay more to the government to sell the good. |
| Social Surplus | Social surplus is the difference between the consumers want to pay for a commodity and the actual price paid. |
| How does tax reduce social surplus? | A tax imposed in an efficient market will create a deadweight loss/decrease the total social surplus by consumers who don’t want to pay and the actual price paid is being increased. |
| Condorcet Paradox | Situation in which a series of pair-wise majority votes over more than two options leads to a cycling of winners. |
| Where does term "Condorcet Paradox" come from? | Comes from French Philosopher Nicolas de Condorcet who noted that the collective preferences of people can be cyclic. |
| What is voter cycling? | If you pair a candidate with one other candidate, then pair the winner with the third candidate, and then pair that winner with the initially defeated candidate, each of the three win one of the three elections. (i.e. A beats B, B beats C, and C beats A) |
| Agenda control | The capacity to set the choices that are available to others. |
| How does the Condorcet Paradox undermine the concept of the government achieving the “will of the people”? | It reveals that the general preferences of society are irrational. The will of the people loses meaning when the preferences are defined by internal contradictions in which the voting system is flawed and meaningless. |
Created by:
MikalahQuillen
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