Chapter 2- Government Decision Making: Public Choice Flashcards
Spend your money on yourself
you care how much you spend and will buy what is most valuable to you
your money on someone else
care how much you spend but don’t know what the recipient values most
someone else’s money on yourself
don’t care how much you spend but buy what is most valuable
someone else’s money on someone else
don’t care how much you spend and don’t know what the recipient values most
Free market prices function to:
- Ration goods to consumers who want them
- Give incentives to producers to satisfy customers
- Give incentives to conserve scarce resources
- Transmit information throughout the economy
the calculation problem
if the state is to improve the market, politicians must know all the information in the economy- how to do every person’s job, how each person values different goods and services
How did Hayek describe the calculation problem?
a problem of the utilization of knowledge which is not given to anyone in its totality
What was Hayek’s question about economic planning?
Should economic planning be done centrally by a few people or by many individuals?
spontaneous order
people organize themselves and interact efficiently if given the freedom to do so
Advantages of individuals in the markets over state planning:
- Freedom is agreeable to most people
- markets utilize ingenuity of millions of minds
- millions of small market experiments, each with low risk
- competition to serve others better
- incentives to use resources efficiently
What is the major advantage of the state in economic planning?
Force
What is a natural experiment?
When a natural event is observed and analyzed as an experiment; ex- experiment of free market vs. government controlled economies (North v. South Korea and East vs. West Germany)- each time the free market economy did better
public choice school of economics
explores how self-interested government employees make decisions (we all make economic choices based on self-interest, even employees of the government)
Rational ignorance
refusing to expend resources to gather information that will almost certainly NOT lead to change in quality of life (ex: voting, interest groups, etc.)
Value of an individual life to that individual
how much will a worker accept to take a more dangerous/life-threatening job
cost
value of best alternative that is sacrificed to obtain something
No free lunch means:
everything has a cost: any decision has at least two alternatives, so any decision involves cost to someone
Macroeconomics
the study of entire economies
regulatory capture
the government is supposed to regulate to make society better, but instead regulate to serve one particular company or group of companies in an industry out of self-interest
status quo minus fallacy
because things work a certain way, if you remove a “piece of the puzzle”, nobody will fill in that piece
compliance cost
costs to businesses to comply with regulations
indirect cost of regulation
results from changes in behavior of firms/individuals due to regulation like: cost of hiring lobbyists, value of output not produced due to regulation; money/time spent trying to avoid regulation, expensive loopholes
CAFE standards
made companies produce more small cars than large cars to meet fuel efficiency standards
interest groups
go to Congress and try to get money/change laws to benefit a certain company/industry
Index of Economic freedom
shows that more free countries tend to have higher average incomes
What contradiction exists in regards to authoritarian rulers of economies
they claim that individuals are not fit to make economic decisions- how can authoritarians themselves make decisions for an entire economy if they themselves are an individual
What did Hayek call “the curious task of economics”?
to show men how little they really know about what they imagine they can design
Unlike in markets, voters can:
make the same mistakes over and over again without significant consequences
fallacy of division
thinking that what is true for a group is true for every individual within that group (ex: American citizens elect the President, therefore each vote matters in determining the President [it doesn’t] )
individual choice
individuals decide for themselves
authoritarian choice
single individual/governing body makes decisions for the populace- may be elected or not
Rational ignorance does what for elected decision makers?
insulates them from harm for policies they make that harm the populace
democratic choice
authoritarian choice made by individuals voting on decisions for the entire populace
When the “regulatory waters” are too high, business do what?
move manufacturing out of the U.S. to foreign nations like China
2 types of Direct Regulatory costs
- Government Administrative costs- sacrificed in order to pay government employees to monitor regulatory program and enforce its statutes
- compliance cost- how much must be sacrificed my the company to follow the law (includes reporting costs, planning costs, administrative costs, and consulting costs)
the incentive problem
people are not willing to pay for goods they do not value
rent seeking
individuals expending resources to prosper using the legal or regulatory system, NOT by producing a good/ service
Bootleggers and Baptists
rent seeker uses others to advance their interests- Bootleggers made money when alcohol was illegal, Baptists wanted alcohol to be illegal for moral reasons, Baptists get alcohol made illegal and Bootleggers make a lot of $$$$
Why do old people vote more often than younger people?
Old people have low time costs
What percentage of the yearly corn crop is used to produce ethanol?
33-50%
