16.5 Government Intervention Flashcards
How do governments determine whether intervention is required?
Whether government intervention is warranted in any particular case depends both on the magnitude of the benefits that the intervention is designed to produce and on the costs of the government action itself. For many types of government activity, cost-benefit analysis can be helpful in considering the general question of when and to what extent governments can successfully intervene.
What is cost-benefit analysis?
An approach for evaluating the desirability of a given policy is based on comparing total (opportunity) costs with total benefits.
The idea behind cost-benefit analysis is simple: Add up the total costs associated with a given policy, then add up the benefits, and implement the policy only if the benefits outweigh the costs.
What are the three reasons it can be difficult to implement a cost-benefit analysis.
First, it may be difficult to ascertain what will happen when an action is undertaken.
Second, many government actions involve costs and benefits that will occur only in the distant future; thus, they will be more complicated to assess.
Third, some benefits and costs are difficult to quantify; for example, the benefits of intervention to protect an endangered animal species. Indeed, some people argue that they cannot be and should not be quantified, as they involve values that are not commensurate with money.
What is the legal power of Canadian governments to intverine in the workings of the economy limited by?
The legal power of Canadian governments to intervene in the workings of the economy is limited by the Charter of Rights and Freedoms (as interpreted by the courts), the willingness of Parliament and provincial legislatures to pass laws, and the willingness and ability of the police and courts to enforce them.
What are the three ways the Canadian government can intervene in the economy?
- Public Provision
- Redistribution Programs
- Regulation
Describe public provision.
National defence, the criminal justice system, public schools, universities, the highway system, and national parks are all examples of goods or services that are provided by governments in Canada. Public provision is the most obvious remedy for market failure to provide public goods, but it is also often used in the interest of redistribution and other social goals (e.g., public education and healthcare services, neither of which are public goods as defined earlier in the chapter).
What are redistribution programs?
Taxes and government spending are often used to alter the distribution of income generated by the free market. Government transfer programs affect the distribution of income in this way.
What are Government regulations?
Government regulations are public rules that apply to private behaviour. InChapter 12, we saw that governments regulate private markets to limit the use of monopoly power. In Chapter 17, we will focus on regulations designed to deal with environmental degradation. Among other things, government regulations prohibit minors from consuming alcohol, require that children attend school, penalize racial discrimination in housing and labour markets, and require that all cars have seat belts.
What are the three considerations when deciding if government intervention is necessary?
First, the government intervention itself is costly;
Second, government intervention is generally imperfect and often fails;
Third, the decision process regarding what action to take is costly and imperfect.
What must governments evaluate when determining if intervetion is a good idea?
In an effort to better evaluate the costs of government intervention, economists distinguish between direct costs and indirect costs.
What are direct costs?
All forms of government intervention use real resources and hence impose direct costs.
The direct costs of government intervention are fairly easy to identify, as they almost always involve well-documented expenditures. In 2017, the total expenditures by all levels of government in Canada were $864 billion, just over 40 percent of total national income.
What are the three types of indirect costs?
- Changes in Costs of Production
- Costs of Compliance
- Rent Seeking
What are changes in Costs of Production?
Government safety and emissions standards for cars raise the costs of both producing and operating cars. Environmental policies that require firms to treat their waste products and emissions increase the overall costs of those firms. In both cases, these costs are much greater than the direct financial costs of administering the regulations.
What is the cost of compliance?
Government regulation and supervision generate a flood of reporting and related activities that are often referred to collectively as red tape. The number of hours of business time devoted to understanding, reporting, and contesting regulatory provisions is enormous. Regulations dealing with occupational safety and environmental control have all increased the size of non-production payrolls. The legal costs alone of a major corporation sometimes can run into tens or hundreds of millions of dollars per year.
What is rent seeking?
Behaviour whereby private firms and individuals try to use the powers of the government to enhance their own economic well-being in ways that are not in the social interest.
Private firms and special-interest groups often lobby governments for policies in their own interest but at the expense of the public interest. Such rent-seeking can impose significant costs on society.
What three maximizing groups does Public Choice theory deal with?
Full-blown public choice theory deals with three maximizing groups.
Elected officials seek to maximize their votes.
Civil servants seek to maximize their salaries and their influence. Voters seek to maximize their own utility.
