Orthodoxy vs. Public Choice

Question 1

Orthodox perspective

Answer 1

Market failure perspective

• technical definition: market fails all the time when it doesn’t reach equilibrium
• working definition: when the market doesn’t give me what I want (more gov oversight is the answer)
• perspective that markets fail to provide adequate provision of a good/service
• markets alone are insufficient to add/control a product/service (therefore, you need gov regulation)

Question 2

Public Choice perspective

Answer 2

Government failure perspective

• Yes, markets fail, but govs fail too
• have to be aware of some flaws that gov has:
• principle agent problem
• electoral preferences
• information problems
• special interest group problems

Question 3

Political economy

Answer 3

The interface between economics and politics and studies the economic consequences of political decisions

Question 4

Social objectives

Answer 4

An objective that in principle is expected to be sought by consensus

Question 5

Three types of social objectives

Answer 5

1. Efficiency
   - Requires maximizing the total income of a society
2. Social justice
   - Multifaceted and involves redistribution of income, equality of opportunity, and protection of the rights to life and property
3. Macroeconomic stability
   - Expressed in avoiding inflation and unemployment and maintaining stability of the banking and financial system

Question 6

Public good

Answer 6

• Can cause people to free-ride on the payments of others

- Public goods are a source of “market-failure”

Question 7

Externalities

Answer 7

Benefit or cost that is felt by society as a whole but is not accounted for in the decision making by the actor (the actor doesn’t feel it)

Question 8

Public Economics

Answer 8

Public Econ is about balancing the gov failure and market failure perspective

Question 9

Natural Monopolies

Answer 9

• A monopoly is natural if competing suppliers would wastefully duplicate fixed costs
• Example: two lighthouses next to each other would be a wasteful duplication of fixed costs
• All non-congested public goods are natural monopolies

Question 10

Asymmetric information

Answer 10

Information is asymmetric when buyers/sellers have private information about themselves that others cannot know

Question 11

Eminent domain

Answer 11

• The right of government to override private possession if it is judged to be in the public interest
• Social justice requires that when a gov exercises the right of eminent domain, compensation be paid to the people who lose

Question 12

Social Justice

Answer 12

• The right to compensation

- The natural right of possession

Question 13

Ex-ante equality

Answer 13

Requires equal opportunity for everyone expressed as equal chances for improvement in life

Question 14

Ex-post equality

Answer 14

Requires that everyone ends up equally, as in a race in which everyone is constrained to cross the finish line at the same time

Question 15

Pareto efficiency

Answer 15

• An economic state where resources cannot be reallocated to make one individual better off without making at least individual worse off
• Implies that resources are allocated in the most economically efficient manner, but does not imply equality or fairness

Question 16

Pareto improvement

Answer 16

A condition on the way to Pareto efficiency whereby goods can be reallocated to make at least one person better off without making any other individual worse off