Chapter 16

Question 1

What is the operative choice when it comes to the basic functions of the government?

Answer 1

It is the choice of which mix of markets and government intervention best suits the people’s hopes and needs

Question 2

What happens when the government’s monopoly of violence is secure and functions with effective restrictions against its arbitrary use?

Answer 2

Citizens can safely carry out their ordinary economic and social activities

Question 3

What is the first and second duty of the sovereign as said by Adam Smith?

Answer 3

The first duty of the sovereign is that of protecting the society from the violence and invasion of other independent societies
The second duty of the sovereign is that of protecting, as far as possible, every member of society from the injustice of oppression of every other member of it

Question 4

Why do governments define and enforce property rights?

Answer 4

So that they can give people a secure claim to the fruits of their own labour

Question 5

What do these property rights inclue?

Answer 5

A clear definition and enforcements of the rights and obligations of institutions such as corporations, religious organizations, and non-profit enterprises

Question 6

What is the formal defence for free markets based on?

Answer 6

The concept of allocative efficiency

Question 7

If all markets were perfectly competitive, and if governments allowed all prices to be determined by demand and supply, then the price would equal what?

Answer 7

Marginal cost for all products and the economy would be allocatively efficient

Question 8

What are the three arguments that informal defence for free markets is based on?

Answer 8

1. Free markets provide automatic coordination of the actions of decentralized decision makers
2. The pursuit of profits in free markets provides a stimulus to innovation and rising material living standards
3. Free markets permit a decentralization of economic power

Question 9

What does a decentralized market system adjust to quickly?

Answer 9

It adjusts to changes such as the prices in a market economy

Question 10

What do individuals risk in a market economy in the hope of earning profits?

Answer 10

They risk their time and money

Question 11

How does the market system work?

Answer 11

It works by trial and error to sort them out and allocates resources to what prove to be successful innovations

Question 12

What are the 3 reasons for why Market Power is inevitable?

Answer 12

1. In many industries economies of scales are such that there is no room for only a few firms to operate at low costs
2. Firms sell differentiated products and thus have some ability to set their prices
3. Firms that innovate with new products or new productions processes gains a temporary monopoly until other firms learn what the innovator knows

Question 13

What does an economy need in order to be allocatively efficient?

Answer 13

Marginal benefit must equal marginal cost for all products

Question 14

What occurs when there are externalities?

Answer 14

Discrepancies between private costs and social costs, or between private benefit and social benefit, occur when there are externalities

Question 15

What does the presence of externalities lead to?

Answer 15

It leads to allocatively inefficient outcome

Question 16

What will a competitive free market do when a negative externality, where social marginal cost (MCs) exceeds private marginal cost (MCp), produce?

Answer 16

It will produce too much of the good (Qc>Q*)

Question 17

What will a competitive free market do when a positive externality, where social marginal benefit (MBp) exceeds private marginal benefit (MBp), produce?

Answer 17

It will produce too little of the good (Qc>Q*)

Question 18

What is a rivalrous good?

Answer 18

It is a good which may not be consumed by many people (cannot be shared)

Question 19

What is an excludable good?

Answer 19

It is a good that is easy to prevent other people from consuming

Question 20

What are the four different types of goods?

Answer 20

1. Private goods
2. Public goods
3. Common-property resources
4. Club goods

Question 21

What are some examples of rivalrous private goods?

Answer 21

Food
A seat on an airplane
An hour of legal advice
A house

Question 22

What are some examples of rivalrous common-property resources?

Answer 22

Fisheries
Rivers and streams
Wildlife
Clean air

Question 23

What are some examples of non-rivalrous club goods?

Answer 23

Art galleries
Roads
Bridges
Cable or satellite TV signal

Question 24

What are some examples of non-rivalrous public goods?

Answer 24

National defence
Public information
Public protection
Radio signal

Question 25

What does the free-rider problem tell us that private markets will usually not provide what kind of good?

Answer 25

Public goods

Question 26

Who provides public goods in situations such as that presented by the free-rider problem?

Answer 26

The government

Question 27

Since public goods are not excludable, it is impossible to prevent what?

Answer 27

Anyone from using them once they are provided

Question 28

What is society’s marginal benefit curve the vertical sum of?

Answer 28

It is the vertical sum of the two individual marginal benefit curves

Question 29

What is the allocatively efficient quantity?

Answer 29

Q*

Question 30

Markets for expertise are prone to what?

Answer 30

Market failure

Question 31

What do we call the situation in which one party to a transaction takes advantage of special knowledge in ways that change the nature of the transaction itself?

Answer 31

Asymmetric information

Question 32

What are the 2 aspects of asymmetric information?

Answer 32

Moral hazard
Adverse selection

Question 33

What 4 situations result in market values and provide a rationale for government intervention?

Answer 33

1. Firms with market power
2. Externalities
3. Common-property resources and public goods
4. Asymmetric information

Question 34

When does the government choose to intervene even int he absence of market failures?

Answer 34

In order to achieve broader social goals

Question 35

What does the tax-and-transfer system do?

Answer 35

It redistributes income

Question 36

What do policies designed to redistribute income often do to economic efficiency?

Answer 36

It reduces it

Question 37

What is Arthur Okun’s “Leaky Bucket”?

Answer 37

It an analogy for the economy that describes that the act of redistribution (carrying the water) reduces the total value of goods and services available to the economy

Question 38

What is paternalism?

Answer 38

It is 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

Question 39

What is cost-benefit analysis?

Answer 39

It is an approach for evaluating the desirability of a given policy, based on comparing total (opportunity) costs with total benefits

Question 40

Name some examples of public provision

Answer 40

National defence, the criminal justice system, public schools, universities, the highway system, national parks, etc

Question 41

Name some examples of redistribution programs

Answer 41

Tax, transfer programs, etc

Question 42

Name some examples of regulation

Answer 42

Seat belts in cars, food and drug safety standards, prohibit minors from consuming alcohol, etc

Question 43

What are some examples of government interventions that impose costs on firms and households over and above the direct financial costs of the policy?

Answer 43

1. changes in cost of production
2. costs of compliance
3. rent seeking

Question 44

What is the most important cause of government failure?

Answer 44

The nature of the government’s own objectives

Question 45

What is public choice theory?

Answer 45

It is a theory that deals with three maximizing groups:
1. Elected officials seek to maximize their votes
2. Civil servants seek to maximize their salaries and influence
3. Voters seek to maximize their own utility