Chapter 2

Question 1

Freedman: when you spend your money on yourself

Answer 1

you care how much you spend and buy what is most valuable

Question 2

Freedman: when you spend your money on someone else

Answer 2

you care how much you spend but you don’t know highest value

Question 3

Freedman: when you spend someone else’s money on yourself

Answer 3

don’t care how much we spend but buy what is most valuable

Question 4

Freedman: when you spend someone else’s money on someone else

Answer 4

don’t care how much you spend and don’t know the recipients highest value

Question 5

free market prices function:

Answer 5

• ration good to consumers who most want them
• give incentives to producers to satisfy consumers
• give incentives to conserve scarce resources
• transmit info throughout the economy

Question 6

the calculation problem

Answer 6

a problem of the utilization of knowledge which is not give to anyone in its totality

Question 7

spontaneous order

Answer 7

people organize themselves and interact efficiently if given freedom to do so – lassiz fair

Question 8

individuals who interact in markets have advantages over state planning

Answer 8

• freedom is agreeable to most people
• markets utilize the ingenuity of millions of minds
• there are millions of small market experiments, which have low risk
• in markets, there are incentives to use resources efficiently

Question 9

natural experiments

Answer 9

the test of markets of state control work better. not planned experiment but examples include N &S Korea and E vs. W Germany

Question 10

GDP Per capita

Answer 10

index of economic freedom
- ex. china and india
free countries are better off

Question 11

public choice school

Answer 11

explores how self-interested government employees make decisions

Question 12

rational ignorance

Answer 12

if you are uninterested and unwilling to invest time into knowing the candidate, it is more beneficial not to vote
refusing to expend resources to gather info that will almost certainly not lead to a change in the quality of life

Question 13

fallacy of division

Answer 13

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

Question 14

individual choice

Answer 14

where individuals decide for themselves

Question 15

authoritarian choice

Answer 15

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

Question 16

democratic choice

Answer 16

an authoritarian choice made by individuals voting for the entire populace
majority is king

Question 17

interest groups

Answer 17

the presence of interest groups means the individuals are forced to spend their resources on goods they don’t want
- solution: limiting state power

Question 18

regulation

Answer 18

originally used by the us constitution to mean “to make regular” today means control

Question 19

direct cost of regulation

Answer 19

government administrative costs: sacrificed in order to pay government employees to monitor the regulatory program and enforce the statutes
compliance cost: how much must be sacrificed by the regulated entity to follow the law, including reporting costs, planning and administrative costs, and consulting costs

Question 20

indirect cost of regulation

Answer 20

result from changes in behavior of firms an individuals due to the regulation including:
value of output that is not produced due to the regulation
wasteful activities that the regulation encourage - hiring lobbyists

Question 21

CAFE

Answer 21

example of regulation – general motors

Question 22

regulatory capture

Answer 22

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

• markets utilize the ingenuity of millions of minds
• there are millions of small market experiments, each with low risk
• in markets, there is competition to serve others
• in markets, there are incentives to use resources efficiently

Question 23

rent seeking

Answer 23

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

Question 24

bootleggers and baptists:

Answer 24

form of rent seeking

rent seeker uses other to do his bidding

Question 25

status quo minus fallacy

Answer 25

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

Question 26

law of unintended consequences

Answer 26

warning that intervening in complex systems may create unanticipated and often undesirable outcomes