Chap 2 Flashcards
How are the gains to society from production maximized?
If we leave prices free to adjust and leave consumers and producers free to transact
Four ways to spend your money
- you on yourself
- you on someone else
- someone else on you
- someone else on someone else
If you spend your money on yourself you…
economize and seek the highest value
If you spend your money on someone else…
you don’t economize but seek the highest value
If someone else spends their money on themselves
they don’t economize and don’t seek the highest value
If someone else spends money on you
they economize but don’t seek the highest value
Free market prices function to: (4)
Ration goods to consumers who most want them; Give incentives to producers to satisfy consumers; Give incentives to conserve scarce resources; Transmit information throughout the economy
What is the Calculation Problem?
The state cannot possess all the information needed to operate as efficiently as individuals do in markets
What is the major advantage of the state?
Force
Two examples of state controlled markets are:
North Korea and E/W Germany
What is Hayek’s view on economic planning?
it is not whether to plan, but who does the planning
What is spontaneous order?
individuals organize and interact efficiently if left freedom
What must the state know to manage the economy?
How to produce (every job in the market), the value of what people want, best way to adjust if something changes
What is the status quo minus fallacy?
conjecture that each regulation fits a hole in reality and without that regulation the hole would be empty. (the regulation is doing something and if we take it away the behavior would escalate)
Why is the status quo minus fallacy not true?
people adjust to compensate for changes.
Advantages of individual markets over state controlled markets: (5)
- freedom is agreeable to most people
- markets utilize the ingenuity of millions of minds
- there are millions of small market experiments, each with low risks
- there is competition to serve others
- incentives to use resources efficiently
What is the public choice school?
explores how self interested government employees make decisions
What did Hayek say is the “curious task of economics?”
to demonstrate to men how little they really know
What is the Index of Economic Freedom?
freer countries tend to have higher average incomes
What is rational ignorance?
refusing to expend resources to gather information that will almost certainly not lead to a change in the quality of life
What is the Rational Ignorance Model meant to explain?
Behavior in terms of self-interest
What is the fallacy of division?
thinking that what is true for a group must be true for all individuals of that group
What do free markets allow of the people?
Individual choice
What is authoritarian choice?
a single individual or governing body making decisions for the populace. may or may not be elected.
If an authoritarian leader is elected, what breaks the link between the will of the populace and the result of collective decisions?
Rational Ignorance
What is democratic choice?
an authoritarian choice made by individuals voting on decisions for the entire populace
T/F Free market outcomes are the same as authoritarian choices.
False, because in authoritarian everyone is bound by others decisions enforced by violence or threat of violence
What does the presence of interest groups mean?
Individuals are forced to spend their resources on goods they do not want
What is the largest interest group?
Old people
Why does Social Security survive? (3)
- old people, who draw benefits, vote
- people nearly old enough to draw benefits vote
- many view it as a retirement program
T/F Special Interest groups are only relevant with regard to state decision making.
True, not with regard to markets because in free markets there are no third party players who spend other people’s money
What are two solutions to special interest groups?
- increasing supervision of themselves
2. limited state power
Regulation means
Control
What are two Direct Costs of regulation?
Government administrative cost; compliance cost
What do Indirect Costs of regulation result from?
changes in behavior of firms and individuals due to regulation
What are 2 Indirect Costs of regulation?
- value of output that is not produced due to regulation
- wasteful activities that the regulation encourages, such as spending resources to hire lobbyists, avoid regulation, take advantage of loopholes that are inefficient
T/F Successful interest groups must be large with many members
False, small and wealthy members can concentrate on a few people, benefits spread among less people. small equals more power.
T/F Regulated firms need only produce in a different way, not a less profitable way than unregulated firms.
False, unregulated firms produce in the most profitable way. Hence a regulation that changes this, must lower profits.
T/F Free markets create jobs but never destroy jobs
False, FM creates AND destroys but is always increasing the value of goods and services that labor produces.
EX: wagon makers lose jobs to train industry. destroyed jobs but created them somewhere else more beneficial.
What is Regulatory Capture?
when regulators find it more advantageous to work to benefit some firms in their industries rather than perform their oversight duties
What is Rent Seeking?
individuals expending resources to prosper, not by creating value, but by using legal and regulatory systems
EX a firm can hire a lobbyists, pay off legislators
T/F Environmentalists are the chief backers of ethanol
False, corn growers and politicians are. Environmentalists don’t support corn farming that takes up so much land and destroys land that doesn’t absolutely need to be destroyed
Why did oil producers pay millions in fines rather than use cellulosic ethanol?
Because it is not manufactured in sufficient quantities to comply with the mandate
