Chapter 16 Flashcards
Describe the basic functions of the government.
- When government’s monopoly of violence is secure and functions with effective restrictions against its arbitrary use, citizen fcan safely carry out their ordinary economic and social activities.
- Governments define and enforce property rights that give people a secure claim to the fruits of their own labour.
- These property rights include clear definition and enforcement of the rights and obligations of institutions, such as corporations, religious organizations, and non-profit enterprises.
Give the formal defence for free markets.
- The formal defence for free markets is based on the concept of allocative efficiency.
- If all markets were perfectly competitive, and if governments allowed all prices to be determined by demand and supply, the price would equal marginal cost for all products and the economy would be allocatively efficient.
Give the informal defence for free markets.
- Free markets provide automatic coordination of the actions of decentralized decision makers
- A decentralized market system adjusts quickly to changes
- As market conditions change, prices in a market economy also change - decision makers can react continually.
- A market system coordinates without anyone needing to understand how the whole system works.
- The pursuit of profits in free markets provides a stimulus to innovation and rising material living standards.
- In a market economy, individuals risk their time and money in the hope of earning profits
- Many fail, some succeed
- The market system works by trial and error to sort them out and allocates resources to what prove to be successful innovations.
- Free markets permit a decentralization of economic power.
- A free-market economy tends to decentralize power and requires less coercion of individuals than any other type of economy.
Why is market power inevitable? [3]
- In many industries economies of scale are such that there is only room for a a few firms to operate at low costs.
- Firms sell differentiated products and thus have some ability to set their prices.
- Firms that innovate with new products or new production processes gain a temporary monopoly until other firms learn what the innovator knows
What does a competitive free market produce with a negative externality?
Too much of the good.
What does a competitive free market produce with a positive externality?
Too little of the good.
What is society’s marginal benefit curve?
The vertical sum of the two individual marginal benefit curves.
What are four situations that result in market failures and provide a rationale for government intervention?
- Firms with market power
- Externalities
- Common-property resources and public goods
- Asymmetric information
What is paternalism?
Intervention in the free choices of individuals by others (including governments) to protect them against what is presumed to be their own ignorance or folly.
Give the general principle of government intervention.
- Even if free markets generated allocatively efficient outcomes, they would be unlikely to generate outcomes consistent with most people’s social goals.
- Furthermore, there is often a tradeoff between achieving these social goals and increasing allocative efficiency.
What are the tools of government intervention? [3]
- Public provision
- Redistribution programs
- Regulation
What is the most important cause of government failure?
Arises from the nature of the government’s own objectives.
What three maximizing groups does public choice theory deal with?
- Elected officials seek to maximize their votes
- Civil servants seek to maximize their salaries and their influence
- Voters seek to maximize their own utility
Describe governments as monopolists.
- Governments face the same problems of cost minimization that private firms do but often operate in an environment in which they are monopoly producers without shareholders
- Large governments face all of the organizational problems faced by large corporations
- They tend to use relatively rigid rules and respond slowly to change.
How much should the government intervene?
Evaluating the costs and benefits of government intervention requires a comparison of the private economic system as it actually works (not as it might work ideally) with the pattern of government intervention as it actually performs (not as it might perform ideally).
