Chapter 5: Government Role And Market Failure

Question 1

Problems of directing and managing government

Answer 1

1- no invisible hand (not self correcting)
2- massive size and scope
3- need for bureaucracy 
4- need for paperwork and inflexibility
5- information aggregation problem
6- lack of accountability

Question 2

Voting problems

Answer 2

• lack of info about voter preference

- put own interests or interests of minority over majority

Question 3

Representative democracy

Answer 3

Allows us to elect representatives to understand the pros and cons of potential laws

Question 4

Principal-agent problem

Answer 4

Interests of agents may not be same as principals

Question 5

Special interest effect

Answer 5

Minority gets what they want because larger groups are difficult to organize and motivate

Question 6

Rent-seeking behavior

Answer 6

Influencing government policies so one can get paid more for providing a good more than it costs

Question 7

Unfounded liabilities

Answer 7

Committing to making future expenditure without gathering enough taxes

Question 8

Chronic budget deficits

Answer 8

Government borrows money to make up for deficit

Question 9

Balanced-budget laws

Answer 9

Make deficits illegal (not national)

Question 10

Fiscal policy

Answer 10

Change in tax rates and spending to offset business cycle

Question 11

Monetary policy

Answer 11

Changes in interest rates to regulate economy. Gov can use control over money supply to lower interest rates during a recession

Question 12

Politicization of fiscal and monetary policy

Answer 12

• politicians target tax/spending changes to special interests (fiscal)
• politicians cut interest rates to boost economy before election (monetary)
• central banks prevent this

Question 13

Bureaucracy and inefficiency

Answer 13

1- market system has incentives
2- test of profit and loss on private firms
3- government employees gain political clout

Question 14

Although government interventions are design to improve economic outcomes,…

Answer 14

These can have outcomes that are less beneficial