Chapter 2- Government Decision Making: Public Choice

Question 1

Spend your money on yourself

Answer 1

you care how much you spend and will buy what is most valuable to you

Question 2

your money on someone else

Answer 2

care how much you spend but don’t know what the recipient values most

Question 3

someone else’s money on yourself

Answer 3

don’t care how much you spend but buy what is most valuable

Question 4

someone else’s money on someone else

Answer 4

don’t care how much you spend and don’t know what the recipient values most

Question 5

Free market prices function to:

Answer 5

1. Ration goods to consumers who want them
2. Give incentives to producers to satisfy customers
3. Give incentives to conserve scarce resources
4. Transmit information throughout the economy

Question 6

the calculation problem

Answer 6

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

Question 7

How did Hayek describe the calculation problem?

Answer 7

a problem of the utilization of knowledge which is not given to anyone in its totality

Question 8

What was Hayek’s question about economic planning?

Answer 8

Should economic planning be done centrally by a few people or by many individuals?

Question 9

spontaneous order

Answer 9

people organize themselves and interact efficiently if given the freedom to do so

Question 10

Advantages of individuals in the markets over state planning:

Answer 10

1. Freedom is agreeable to most people
2. markets utilize ingenuity of millions of minds
3. millions of small market experiments, each with low risk
4. competition to serve others better
5. incentives to use resources efficiently

Question 11

What is the major advantage of the state in economic planning?

Answer 11

Force

Question 12

What is a natural experiment?

Answer 12

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

Question 13

public choice school of economics

Answer 13

explores how self-interested government employees make decisions (we all make economic choices based on self-interest, even employees of the government)

Question 14

Rational ignorance

Answer 14

refusing to expend resources to gather information that will almost certainly NOT lead to change in quality of life (ex: voting, interest groups, etc.)

Question 15

Value of an individual life to that individual

Answer 15

how much will a worker accept to take a more dangerous/life-threatening job

Question 16

cost

Answer 16

value of best alternative that is sacrificed to obtain something

Question 17

No free lunch means:

Answer 17

everything has a cost: any decision has at least two alternatives, so any decision involves cost to someone

Question 18

Macroeconomics

Answer 18

the study of entire economies

Question 19

regulatory capture

Answer 19

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

Question 20

status quo minus fallacy

Answer 20

because things work a certain way, if you remove a “piece of the puzzle”, nobody will fill in that piece

Question 21

compliance cost

Answer 21

costs to businesses to comply with regulations

Question 22

indirect cost of regulation

Answer 22

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

Question 23

CAFE standards

Answer 23

made companies produce more small cars than large cars to meet fuel efficiency standards

Question 24

interest groups

Answer 24

go to Congress and try to get money/change laws to benefit a certain company/industry

Question 25

Index of Economic freedom

Answer 25

shows that more free countries tend to have higher average incomes

Question 26

What contradiction exists in regards to authoritarian rulers of economies

Answer 26

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

Question 27

What did Hayek call “the curious task of economics”?

Answer 27

to show men how little they really know about what they imagine they can design

Question 28

Unlike in markets, voters can:

Answer 28

make the same mistakes over and over again without significant consequences

Question 29

fallacy of division

Answer 29

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] )

Question 30

individual choice

Answer 30

individuals decide for themselves

Question 31

authoritarian choice

Answer 31

single individual/governing body makes decisions for the populace- may be elected or not

Question 32

Rational ignorance does what for elected decision makers?

Answer 32

insulates them from harm for policies they make that harm the populace

Question 33

democratic choice

Answer 33

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

Question 34

When the “regulatory waters” are too high, business do what?

Answer 34

move manufacturing out of the U.S. to foreign nations like China

Question 35

2 types of Direct Regulatory costs

Answer 35

1. Government Administrative costs- sacrificed in order to pay government employees to monitor regulatory program and enforce its statutes
2. compliance cost- how much must be sacrificed my the company to follow the law (includes reporting costs, planning costs, administrative costs, and consulting costs)

Question 36

the incentive problem

Answer 36

people are not willing to pay for goods they do not value

Question 37

rent seeking

Answer 37

individuals expending resources to prosper using the legal or regulatory system, NOT by producing a good/ service

Question 38

Bootleggers and Baptists

Answer 38

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 $$$$

Question 39

Why do old people vote more often than younger people?

Answer 39

Old people have low time costs

Question 40

What percentage of the yearly corn crop is used to produce ethanol?

Answer 40

33-50%