Chapter 2

Question 1

Free market prices function to…

Answer 1

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

Question 2

“the calculation problem”

Answer 2

If the state is to improve on the market it must know this information better than those who do these jobs.

Question 3

spontaneous order

Answer 3

that people organize themselves and interact efficiently, if given freedom to do so

Question 4

natural experiment

Answer 4

the experiment has been done for us

Question 5

“public choice school” of economics

Answer 5

how self-interested government employees make decisions

Question 6

rational ignorance

Answer 6

refusing to expend resources to gather information that will almost certainly not lead to a change in the quality of life

Question 7

fallacy of division

Answer 7

thinking that what is true for a group must be true for all the individuals of the group

Question 8

individual choice

Answer 8

where individuals decide for themselves

Question 9

Authoritarian Choice

Answer 9

involves a single individual or governing body making decisions for the populace.

Question 10

Democratic Choice

Answer 10

is an authoritarian choice made by individuals voting on decisions for the entire populace.

Question 11

Direct costs of regulation

Answer 11

Government administrative costs

Compliance cost

Question 12

Government administrative costs

Answer 12

sacrificed in order to pay government employees to monitor the regulatory program and enforce the statutes.

Question 13

Compliance cost

Answer 13

how much must be sacrificed by the regulated entity to follow the law, which includes reporting costs, planning and administrative costs, and consulting costs.

Question 14

Indirect Costs of Regulation

Answer 14

-results from changes in behavior of firms and individuals due to the regulation, including
o value of output that is not produced due to the regulation
o wasteful activities that the regulation encourages, such as spending resources to hire lobbyists, to avoid the regulation, or to take advantage of loopholes that are inefficient, except for the regulation–like expensive tax shelters.

Question 15

Regulatory capture occurs when…

Answer 15

regulators find it more advantageous to work to benefit some firms in their industries rather than to perform their oversight duties

Question 16

Rent seeking

Answer 16

involves individuals expending resources to prosper, not by creating value, but by using the legal and regulatory systems

Question 17

Bootleggers and Baptists problem

Answer 17

an interesting form of rent seeking, because the rent seeker uses others to do his bidding. The bootleggers can only make a living if alcohol is illegal, since efficient legal production would put them out of business. So they use the Baptists, who also wish alcohol to be illegal, but for non-materialistic reasons, as stalking horses in the regulatory process

Question 18

law of unintended consequences

Answer 18

is the warning that intervening in a complex system may create unanticipated and often undesirable outcomes