Chapter 2 Flashcards
What are the functions of a free market?
To ration goods to consumes truly want them, Give incentives to producers to satisfy consumers, give incentives to conserve scarce resources, and to transmit information throughout economy.
The Calculation Problem
To manage economy, one must know about all jobs. Allocating factors of production (resources) by using economic planning.
What happens if prices are left free to be adjusted and consumers/ producers free to transact?
Gains are maximized.
How do individuals act when they pay costs and receive benefits for their actions?
They are acting efficiently.
Spontaneous Order
People organize themselves and interact efficiently if given freedom to do so.
What is the major advantage of a state?
It can use force.
Natural Experiment
Experimenting whether market and state control works better that controlling economic activities.
Public Choice School
Explores how self-interested government employees make decisions.
What must a government official do to not use force?
They must resort to another plan. For example, if an official thinks credit cards or milk is illegal, they can use force and arrest people who purchase it or they can make the items illegal.
Theory of Rational Ignorance
Cost of education oneself on an issue exceeds the potential benefit that knowledge would provide. Refusing to expend resources to gather information that will almost certainly NOT lead to a change in the quality of life.
Fallacy of Division
Occurs when one reasons logically that something true for the whole must be true for some of its parts.
Individual Choice
Individuals decide for themselves
Authoritarian Choice
Single individual or governing body making decisions for the populace.
Democratic Choice
Authoritarian choice made by an individual voting on decisions for entire populace.
What is a solution to interest groups burdening the economy?
Limiting state power.
Less regulation can…
make it possible for new firms to thrive.
Direct cost of regulation
- Government administrative costs: sacrificed in order to pay gvt employees to monitor regulatory programs and enforce statutes.
- Compliance cost: how much must be sacrificed by the regulated entity to follow the law, which includes reporting costs, planning and administrative costs, and consulting costs.
Indirect Cost of Regulation
Results from changes in behavior of firms and individuals due to the regulation. Includes value of output not produced due to regulation and wasteful activities that regulation encourages.
Marginal curve is…
supply curve!
Regulatory Capture
When regulators find it more advantageous to work to benefit some firms in their industries rather than to perform their oversight duties.
Rent Seeking
Individuals expending resources to prosper, not by creating value, but by using legal and regulatory systems.
Bootleggers and Baptists
Form of rent seeking. Rent seeker uses others to do his bidding.
Status Quo Minus Fallacy
Particular variant of the status quo fallacy: proposes that we consider the status quo, eliminates one element of it, and the removed element has only a direct effect which will never be composed for.
Law of Unintended Consequences
Warning that intervening in a complex system may create unanticipated and often undesirable outcome.
