Chapter 2

Question 1

Free Market Prices function to:

Answer 1

1. Ration goods to consumers who most want them
2. Give incentives to producers to satisfy consumers
3. Give incentives to conserve scarce resources
4. Transmit information throughout the economy

Question 2

Spontaneous order

Answer 2

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

Question 3

The calculation problem says

Answer 3

the state cannot possess and integrate all the information needed to operate as efficiently as individuals in markets

Question 4

What does the “public choice school” study?

Answer 4

how self-interested government employees make decisions

Question 5

Rational ignorance

Answer 5

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

Question 6

Fallacy of division

Answer 6

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

Question 7

Individual choice

Answer 7

Individuals decide for themselves

Question 8

Authoritarian choice

Answer 8

single governing body makes decisions for populance

Question 9

Democratic choice

Answer 9

authoritarian choice made by individuals voting on decisions for the populance

Question 10

Why does social security succeed?

Answer 10

1. old people, who draw benefits, vote
2. People nearly old enough to draw benefits also vote
3. Many view the program as a retirement program, contrary to its structure and legal status

Question 11

What are the direct costs of regulation?

Answer 11

Government administrative costs and compliance cost

Question 12

Indirect costs of regulation

Answer 12

result from changes in behavior of firms and individuals due to the regulation

Question 13

Regulatory capture

Answer 13

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

Question 14

Rent seeking

Answer 14

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

Question 15

Bootleggers and Baptists problem

Answer 15

bootleggers want alcohol to be illegal so they can make money, Baptists want it to be illegal because of religion, but both benefit

Question 16

Status quo minus fallacy

Answer 16

it proposes that we consider the status quo, eliminate one element of it, and conjecture that the removed element will have only a direct effect which will never be compensated for

Question 17

Law of unintended consequences

Answer 17

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

Question 18

What did HAYEK believe about economic planning?

Answer 18

there is no dispute whether planning is to be done or not, but there is dispute whether planning is to be done centrally, by one authority for the whole economic system, or is it to be divided among many individuals

Question 19

What advantage does the state have over markets?

Answer 19

the state can use force to produce some goods which markets cannot produce because they can’t be individually sold and consumed (like national defense)

Question 20

What natural experiments have been done on state control of markets?

Answer 20

Korea and Germany

Question 21

What is a noteworthy result shown by index of Economic Freedom?

Answer 21

freer countries tend to have higher incomes

Question 22

What did Hayek call the “curious task of economics?”

Answer 22

to demonstrate to men how little they really know about what they imagine they can design

Question 23

How does Bastiat describe the costs and benefits of interest groups?

Answer 23

benefits are concentrated and the cost is spread thin over many people

Question 24

T/F regulated firms need only produce in a different way, not in a less profitable way than unregulated firms.

Answer 24

Unregulated firms produce in the most profitable way, hence, a regulation that changes this must lower profits

Question 25

Types of costs

Answer 25

government administrative, business compliance, business indirect

Question 26

Indirect costs of regulation

Answer 26

value of output not produced by regulation, wasteful activities to avoid regulation, to hire lobbyists, or to take advantage of otherwise ineffiecient loopholes