Chapter 2: Government Decision Making: Public Choice

Question 1

four ways to spend money

Answer 1

Economize and seek highest value
Economize and don’t seek highest value
Don’t economize but seek highest value
Don’t economize and don’t seek highest value

Question 2

Free market prices function to

Answer 2

Ration goods to consumers who most want them
Give incentives to producers to satisfy consumers
Give incentives to conserve scarce resources

Question 3

“the calculation problem.”

Answer 3

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

Question 4

spontaneous order

Answer 4

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

Question 5

Individuals who interact in markets have advantages over state planning, such as:

Answer 5

• Freedom is agreeable to most people
• 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 6

natural experiment

Answer 6

An experiment that occurs over the course of history naturally.

Question 7

“public choice school”

Answer 7

explores how self-interested government employees make decisions

Question 8

rational ignorance

Answer 8

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

Question 9

fallacy of division

Answer 9

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

Question 10

individual choice

Answer 10

where individuals decide for themselves which is allowed in free markets

Question 11

Authoritarian Choice

Answer 11

involves a single individual or governing body making decisions for the populace. The decision maker(s) may be elected or not. If elected, rational ignorance breaks the link between the will of the populace and the results of the collective decisions.

Question 12

Democratic Choice

Answer 12

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

Question 13

The original meaning of regulate

Answer 13

as used in the U. S. Constitution is “to make regular.”

Question 14

Today, regulation means

Answer 14

“control”

Question 15

Direct costs of regulation

Answer 15

Government administrative costs and compliance cost

Question 16

Government administrative costs

Answer 16

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

Question 17

Compliance cost

Answer 17

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 18

Indirect Costs of Regulation

Answer 18

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 19

CAFE standards (Corporate Average Fuel Economy)

Answer 19

force auto manufacturers to maintain high average fuel efficiency.

Question 20

Regulatory capture

Answer 20

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

Question 21

Rent seeking

Answer 21

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

Question 22

Bootleggers and Baptists

Answer 22

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 23

Status quo minus fallacy

Answer 23

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 24

law of unintended consequences

Answer 24

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