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, and Transmit information throughout the economy, as explained below

Question 2

Calculation Problem

Answer 2

If the state is to improve on the market, then politicians must know this information better than people 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

we could draw an arbitrary border across a country, let one part be free and let the other part be controlled by the state

Question 5

public choice school

Answer 5

which explores 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

Government administrative costs

Answer 11

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

Question 12

Compliance cost

Answer 12

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 13

Indirect Costs of Regulation

Answer 13

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, and
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 14

Regulatory capture

Answer 14

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

Question 15

Rent seeking

Answer 15

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

Question 16

Bootleggers and Baptists

Answer 16

The bootleggers can only make a living if alcohol is illegal, since efficient legal production would put them out of business. So they depend on the Baptists, who also wish alcohol to be illegal, but for non-materialistic reasons, to protect them in the regulatory process

Question 17

Status quo minus fallacy

Answer 17

is a particular variant of the status quo fallacy. It proposes that we consider the status quo, eliminate one element of it, and conjecture that this removed element will have only a direct effect which will never be compensated for

Question 18

law of unintended consequences

Answer 18

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