Gov Policy Exam Prep Flashcards
What is Positive Theory
Positive seeks to answer why governments do what they do. Positive describes and explains economic phenomena. An example is “Government-provided healthcare increases public expenditures.” Because it is fact-based and has no value judgement.
What is normative theory
Normative economics focuses on value-based judgments aimed at improving economic development, investment projects, and the distribution of wealth.
Example: “The government should provide basic healthcare to all citizens.” As you can deduce from this statement, it is value-based, rooted in personal perspective, and satisfies the requirement of what “should” be.
What does the judicial branch do? “Role of the courts”
- Dispute resolution
- Interpretation of legislation
- Constitutional interpreter and gatekeeper
- Review of govt agencies
About private enterprise
- Private firms decide what to produce, how to produce it, and what to charge.
- Private individuals decide what and how much to buy
- Private enterprise makes up most economic decisions in Canada
Normative reasons for public enterprise
- Market failure (e.g. monopoly, externalities, public goods)
- Fairness
- Macroeconomic stabilization
- Other e.g. cultural preservation
About public goods
- Public goods is caused by incomplete property rights.
- Can lead to the free ryder problem
Two key characteristics of public goods
- Non-rival in consumption
- Non-exclusive
What is the free rider problem
The free rider problem is a type of market failure that occurs when people benefit from a shared resource and do not pay for it. So essentially it’s a good that everyone uses but not everyone wants to pay for it.
What are examples of a free rider problem?
An example could be National defense, people wont fund military but still are defended by them.
Publicly provided goods vs Public goods
Publicly provided goods are different from public goods but public goods are normally publicly provided.
Planetary public good
Clean air is a planetary good. Many people can free ride by polluting but still be able to breath air.
Planetary, public good and free rider problem astroid example
If an asteroid was heading for earth and scientists believe if they could get ahead of it early enough with a 500 million dollar microscope then a public good could be provided; however, it would most likely end up in a market failure as many people will freeride. They are on board with getting the 500 million dollar microscope but many won’t pay for it yet still gain benefits as others will pay and earth will be saved.
2 Causes of externalities
- High transaction costs
- Incomplete property rights
Coase theorem
The Coase Theorem, put simply, suggests that when there are property rights and transactions costs are low, private individuals or entities can negotiate and reach efficient outcomes, regardless of how those property rights are initially assigned.
Coase theorem example
imagine you and your neighbor disagree about something that affects both of you, like noise from a party. According to the Coase Theorem, if it’s easy for you both to talk and make deals (low transaction costs) and if you have clear property rights (like owning your homes), you can work out a solution that benefits both of you, such as agreeing on quieter hours or soundproofing your homes.
Positive externalities vs Negative externalities
Externalities are essentially side effects of actions that either positively or negatively affect 3rd parties.
Examples of positive externalities
When someone gets vaccinated, not only do they protect themselves from the disease, but they also contribute to the overall health of the community.
Examples of negative externalities
our neighbor has a dog that barks at passersby:
This scenario can be considered a negative externality. The noise from the dog’s barking imposes a cost or nuisance on passersby who were not part of the decision to own the dog.
the 4 policy solutions
- Internalizing externalities:
- Controls and standards
- Tax and Subsidies
- Cap and Trade
Tax and Subsidies policy solution
- Easier to set than standards
Taxes activities that generate negative externalities. - Gives polluters an incentive to reduce pollution.
- Revenue can be used to pay for environmental programs.
- Subsidizes activities that generate positive externalities.
- Gives providers of positive externalities an incentive to do more.
Cap and Trade policy solution:
- Involves a cap on the maximum allowable emissions (quantity control).
- Divides the cap into permits that grant the right to emit a certain amount
- Holders can sell, buy, or trade permits which creates a market.
3 Main Types of natural resources
- Renewable
- Land
- Nonrenewable
Summary of Fish activity regarding property rights
- When property rights are assigned, there seems to be more control over how many fish can be fished.
- When no such rules are assigned, the chances of less fish to be fished are high as it’s a free for all.
- When there are regulations set where people have to wait till fishing season or can only fish in a certain area, then people will likley get more fish as their are less people in their area and fish have the time to repopulate.
Common property resources
Common property resources are resources that are owned and managed collectively by a group of people or are accessible to everyone without exclusive ownership; however, without regulations, places like fisheries can be depleted.
What is the objective of a trade?
The objective of a trade is to essentially gain something that can benefit you without giving up something that will harm you. Essentially you want to get more of what you give up.
what is opportunity cost?
The cost of giving up the best foregonenalternative.
example: Opportunity Cost: The potential earnings from working full-time during the years spent in college.
Next Best Alternative: Working full-time immediately after high school.
what is scarcity?
Limited resources in the face of unlimited wants.
example: Tickets for a popular concert, everyone wants to go but there is only so many seats.
Rational choice
Optimally chose the alternative that has the greatest benefits over costs
What is Comparative advantage?
Comparative advantage is the ability of one individual, company, or country to produce a good or service at a lower opportunity cost than others. In simpler terms, it’s about being relatively better at producing something compared to someone else
Examples of comparative advantage
If Kindo is good at baking cakes and Kuppy is good at fixing cars, even though Kindo can fix cars as well and Kuppy can bake cakes but Kindo bakes faster and Kuppy fixes cars faster, they should stay with the skills that they are better at so they can produce more and trade after to make up for it.
Ricardo’s theory
“a nation will be better off if it specializes in the goods and services for which it has low opportunity costs and trades for goods and services for which it has high opportunity costs.”
About Trade barriers
- Protectionism- Protectionism refers to government policies and actions that restrict or control international trade to protect domestic industries from foreign competition.
- Tariffs- Tariffs are taxes imposed by governments on imported goods. They are one of the most common forms of protectionism and serve as a barrier to foreign goods entering the domestic market.
- Non Tariffs- Non-tariff barriers can hinder market access for foreign goods, increase transaction costs, and create uncertainty for exporters.
About perfect competition
Perfect competition is a theoretical market structure where there are many buyers and sellers, homogeneous products, perfect information, freedom of entry and exit, and no barriers to competition.
perfect competition concept applied
consumers in the market for wheat are able to find several other sellers of wheat that look and taste exactly the same. This structure basically has to sell at the same or lower price as competitiors as consumers will find the same product somewhere else if not.
Competition law and policy
Goal: ensure that markers achieve acceptable levels of competition.
Policy expressed in Competition Act
Administered by Competition Bureau and Competition Commission.
Competition Act is both criminal and civil
about Collusive agreements or cartels
-Prices (Price Fixing)
-Quantities (Limiting Supply)
-Market Areas (Regional Monopolies)
-Closely Related Matters
More on collusion
Act makes collusive conspiracies criminal acts
It specifically prohibits:
price fixing
bid-rigging
market sharing
quotas, and
agreements to deter entrants
Collusion and cartels example: Cavier market
Overall, while changes in the price of sturgeon caviar can have significant effects on producers of substitute caviar, it’s unlikely that substitute firms would have an incentive to help reestablish a caviar cartel due to the competitive advantages and dynamics of the market
The difficulty with collusive contracts
- They are illegal and unenforceable.
- Contract is evidence
- Contract doesn’t adhere that others will stay true to the deal.
The incentive to defect
The incentive to defect in a market refers to the motivation for a participant to break or deviate from an agreement, such as a cartel, in order to pursue their own self-interest. In simpler terms, it’s the temptation for someone to cheat or go against the agreed-upon rules.
Prisoners dillema
Imagine two criminals are arrested and placed in separate cells, and the police offer each of them a deal: if one stays silent (cooperates) while the other confesses (betrays), the silent one will get a light sentence, while the confessing one will go free. If both stay silent, they’ll both get a moderate sentence. If both confess, they’ll both get a harsh sentence
Innovations as public goods
- Free riders can reverse engineer and copy the developments of innovators.
Free riders’ production costs are lower than those of the innovators.
Free rider problem disincentivizes expensive research necessary to innovate.
Innovations would thus be underprovided
Governments correct this problem by establishing intellectual property rights
Innovation Externalities
Positive externalities from the R & D process are called knowledge spillovers
Other individuals and firms gain access to information about innovations
The result is unpriced positive impacts on third parties who did not innovate
Without intervention these spillovers would be underprovided
Government thus wants to encourage these spillovers
What are intellectual property rights?
Intellectual property refers to creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images used in commerce. These creations are protected by law through various forms of intellectual property rights, which grant exclusive rights to the creators or owners for a specified period.
Examples of intellectual property rights
- Copyrights
- Patents
- Trademarks
- Trade secrets
Milton Friedman and CSR
- Primary responsibility is to shareholders.
- Maximizing profits maximizes social welfare.
- CSR expenditures are illegitimate.
4.Managers lack expertise to invest in CSR
The legal duty of directors/managers
act honestly and in good faith with a view to the best interests of the corporation
Stakeholder Theory:
Stakeholder theory argues that corporations have obligations not only to shareholders but also to other stakeholders, including employees, customers, suppliers, and the community. Advocates of stakeholder theory argue that directors should consider the impact of their decisions on all stakeholders, not just shareholders.
Moral agency
Is essentially the ability to understand right from wrong.
Public enterprise
- Operated at arms length
- Government owenership
example: ICBC because it’s operated at arms length and government owned.
Explain the free-rider problem and discuss why it is particularly significant in the context of environmental public goods such as national parks or clean air.
The free-rider problem occurs when individuals consume a good without paying for it, which is possible when goods are non-excludable and non-rivalrous, like public parks or clean air. This leads to underfunding and potential degradation of these goods because there is no incentive to contribute voluntarily to their maintenance or preservation, assuming others will bear the cost.
What are the key arguments for and against the classical view of corporate social responsibility (CSR) as advocated by Milton Friedman? Discuss with examples.
Milton Friedman argues that the sole responsibility of business is to increase its profits, contending that this singular focus benefits society by optimizing resources and creating economic growth. Opponents argue that businesses should account for impacts on all stakeholders, not just shareholders, suggesting that CSR strategies can lead to sustainable business practices and long-term financial gains, thereby aligning ethical obligations with corporate interests.
Describe how government regulations can stifle competition in a market. Provide an example to illustrate your point based on Canadian competition policy.
Government regulations can stifle competition by creating barriers to entry or unfairly benefiting certain companies, leading to a less competitive market. For example, if a law requires expensive, unnecessary upgrades for new entrants but not for established firms, it can prevent new competitors from entering the market, maintaining a monopolistic status for the incumbents.
Discuss sustainable ways to manage non-renewable resources, focusing on the economic principles that should guide such management.
Sustainable management of non-renewable resources involves maximizing the economic benefit while minimizing environmental impact. Economic principles such as the Hotelling Rule, which suggests that the rate at which prices of exhaustible resources rise should equal the interest rate, can guide this. Implementing taxes or creating markets for pollution rights can also help manage the depletion rates responsibly.
Explain the concept of comparative advantage and how it justifies free trade between countries. Use the example of trade between two countries producing wheat and cloth.
Comparative advantage occurs when a country can produce a good at a lower opportunity cost compared to another. This principle supports free trade, suggesting countries should specialize in producing goods where they have a comparative advantage. For example, if Country A has a lower opportunity cost in producing cloth and Country B in wheat, both countries benefit from specializing and trading these goods, leading to more efficient global resource allocation.
What are negative externalities, and how can government interventions help to correct them? Provide a specific example related to pollution.
Negative externalities occur when the production or consumption of a good causes a harmful effect on third parties. Government interventions like taxes, regulations, or subsidies can correct these externalities by internalizing the cost of the harm. For example, imposing a carbon tax on companies based on their emissions can encourage reductions in pollution levels, aligning private costs with social costs
Discuss the relationship between corporate governance and CSR. Why is it important for a corporation to consider more than just profit maximization?
Corporate governance involves oversight of a company’s management to ensure accountability towards shareholders and other stakeholders. Integrating CSR into corporate governance is vital because it ensures the company considers environmental stewardship, social responsibility, and ethical behavior, which can enhance its reputation, ensure long-term sustainability, and mitigate risks that could impact profitability.
Explain the concept of market failure in the context of uncompetitive markets. What role does the Competition Bureau play in addressing these failures?
Market failure in uncompetitive markets occurs when firms exert excessive market power, leading to inefficient resource allocation and welfare losses. The Competition Bureau enforces laws to prevent and remedy anti-competitive practices like monopolies and cartels, ensuring markets remain competitive and efficient, which promotes innovation and consumer choice.
Discuss the impact of non-tariff barriers on international trade. Provide an example of a non-tariff barrier that might be used by Canada and explain its economic impact.
Non-tariff barriers (NTBs) like quotas, import licenses, and standards can restrict imports by making it harder or more expensive to import goods. For example, Canada might impose strict safety or environmental standards that disproportionately affect imported goods. While these measures protect domestic industries and consumers, they can reduce trade efficiency and lead to higher prices for consumers.
Shared value approach
CSR is connected with financial gains so therefore the financial gains incentivize to keep going with CSR.
CSR and government policy
- CSR fills in some gaps left by gov policy
- Not a complete substitute
- CSR can be both undermined and supported by gov policy.
