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Flashcards in Chapter 2 Deck (28):

How do you spend money on yourself?

You economize and seek highest value


How do you spend money on someone else?

You economize but don't seek highest value


How does someone else spend money on you?

They don't economize, but they seek the highest value


How does someone else spend their money on someone else?

They don't economize, nor seek the highest value.


Free market prices function to

Ration goods to consumers who most want them, give incentives to producers to satisfy consumers, give incentives to conserve scare resources, and to transmit information through the economy.


The calculation problem is a problem how to

secure the best use of resources known to any of the members of society and the utilization of knowledge which is not given to anyone in its totality.


Spontaneous order is

people organizing themselves and interacting efficiently, when given the ability to do so.


North Korea and South Korea are a model of

market efficiency in a controlled versus more free society.


What does the "public choice school" explore?

How self-interested government employees make decisions.


Rational ignorance is

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


The fallacy of division is

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


Free markets allow

individual choice.


Authoritarian Choice involves

a single individual or governing body making decisions for the populace. The decision maker may be elected or not.


Democratic Choice

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


Why are authoritarian choices not the same as free market outcomes?

Everyone is bound by others' decisions which are enforced by violence or threat of violence by the state.


The presence of interest groups means that

individuals are forced to spend their resources on goods they do not want.


A solution to interest groups

is limited state power. If the state can't hand out favors, no interest group is willing to give campaign contributions to gain the stat decision maker' favor.


Today, regulation means



Direct costs of regulation are

Government administrative costs and compliance costs


Government administrative costs are

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


Compliance costs are

how much must be sacrificed by the regulated entity to follow the law (report costs, planning and administrative costs, and consulting costs)


Indirect costs of regulation are

the results from changes in behavior of firms and individuals due to the regulations (i.e. wasteful activities that regulation encourages,


Demand is

based on how much consumers value a good.


Supply is based on

how expensive the good is to produce.


Regulatory capture

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


Rent seeking

involves individuals expending resources to prosper by using the legal and regulatory systems


Status quo minus fallacy is

a consideration of the status quo, minus one element, and saying that this will cause a direct effect that will never be compensated for.


the law of unintended consequences

shows that individual adjustments may not only weaken the intended results of the intervention, but sometimes yield the opposite of the intended effect