Microeconomics Chapter 5 Notes
Microeconomics Chapter 5 Notes ECON 1010
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This 3 page Class Notes was uploaded by Danyn Notetaker on Thursday March 3, 2016. The Class Notes belongs to ECON 1010 at Tulane University taught by Armine Shahoyan in Summer 2015. Since its upload, it has received 23 views. For similar materials see Microeconomics in Economcs at Tulane University.
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Date Created: 03/03/16
Government’s Economic Role - Although the U.S. economy is primarily a market system, there is still a prominent tole for government in determining how the economy functions - Governments right to coerce • One key difference between the economy activity of government, private ﬁrms and individuals is that the government can use force • Force and economic efﬁciency - The government can correct market failure by producing public goods - The government can also reduce private sector economic risk - The problem of directing and managing government • Government can substantially improve allocative and productive efﬁciency if it directs its coercive power toward rectifying market failures and providing a low-risk economic environment for the private sector • Government faces organizing millions of employees to do thousands pf jobs • No invisible hand: Government economic policies aren’t self-correcting Massive size and scope: The size and scope of government makes it difﬁcult to identify and • ﬁx economic inefﬁciencies • Need for bureaucracy: Given the size of the government, elected ofﬁcials must rely on many layers to run • Need for paperwork and inﬂexibility: To make sure laws are followed • Information aggregation problem: - Bureaucracies have difﬁculty with effectively aggregating information Government Failure - Government can fail despite knowing voter preference - Representative democracy and principle agent problem The principle-agent problem occurs because conﬂicts arise when tasks are delegated by • one group of people (principle) to another group of people (agent) • In a democracy , elected ofﬁcials (agents) have goals like reelection which conﬂicts with the interest of voters - Special interest groups may promote the interests of a small group at the expense of society at large • The special interest effect refers to the situations where a small number of people will receive large gains at the expense of a larger number of people who individually suffer small losses - The small group group will be informed and highly vocal on the issue and press politicians for approval - The large numbers who will each suffer small losses will not have the incentive to be informed or feel strongly - The result is that the politician will support the special interest program, whose supporters will notice the vote in their favor, and ignore the majority who don’t feel strongly • Pork-barrel politics is an example of special interest effect - Pork-barrel politics is often combined with log rolling (trading favors) - Rent seeking behaviors occur when a transfer of wealth at someone else’s or society’s expense; occurs through government action Ex: Tax loopholes that beneﬁt only certain groups; and occupational licensing that requires • more than necessary to protect consumers - Clear beneﬁts, hidden costs (or reverse, immediate costs, and future more vague beneﬁt) are another dilemma for politicians trying to decide on public programs • Where the beneﬁts are recognizable and popular, the politician may vote for the program even if the costs out weigh the beneﬁts - Unfunded Liabilities: • The political tendency to favor priorities that have immediate payouts but deferred costs also leads to many government programs unfunded liabilities AN unfunded liability occurs when the government commits to future expenditures without • simultaneously committing to collect enough tax revenues to pay for those expenditures • Unfunded liability: present value of projected tax revenue for the program - Social security - Medicare - Chrome Budget Deﬁcits: A budget deﬁcits occur whenever tax revenues are greater than spending in a year • Deﬁcits might result in economic inefﬁciency by allowing government to control and direct a large fraction of economies resources • A debt crisis might occur because the government has accumulated so much debt that creditors are no longer willing to lend to the government - This can result in a major ‘shock’ to the economy as the government raises taxes and cuts spending at unprecedented levels - It is better to gradually raise taxes and phase out programs rather than to implement a drastic adjustment to an economy - Misdirection of Stabilization Policy: Stabilization policy attempts to use ﬁscal and money policy to ‘smooth out’ business cycle ﬂuctuation • Fiscal policy attempts to stimulate spending by changing tax rates and spending levels • Monetary policy tries to stimulate spending by changing interest rates • The problem is that politicalization of ﬁscal and monetary policy might result in abuse and inefﬁciency by the government - Limited and bundled choice is another problem with public goods • The voter must choose between a few candidates who will have the power to select the public goods and services to be ﬁnances by voter tax money • Choices are ‘bundled’ in that the limited set of candidates will govern over a variety of issues • In the private sector, the consumer has a multitude of choices available - Unintended consequences • Sometimes laws and programs the government put in place to try to make improvements in society can have unintended consequences - Government fuel-efﬁciency requirements for cars which forced car producers to make smaller cars that led to more fatalities in car accidents - Bureaucracy and inefﬁciency can be another problem in the public sector because the proﬁt motive is not present - Inefﬁcient Regulation and Intervention • Government regulates many aspects of the economy wit the hope that these regulations improve economic outcomes • Regulatory capture occurs when the government agency that is supposed to supervise a particular industry becomes heavily inﬂuences by the industry that it is supposed to regulate - Some argue that regulatory capture has occurred in the FDA - Deregulation as an alternative to regulation will reduce regulation capture • Government’s poor investment track record - Loan guarantees reduced downside risk - Also socialize losses and private gains - Corruption often occurs in government when ofﬁcials abuse power • A government ofﬁcial is bribed to do what they should already be doing • A government ofﬁcial accepts a bribe to do something he doesn’t have the legal authority to do An interesting debate is whether or not campaign contributions should be considered • bribes - Imperfect institutions exist in both the public and private sectors, which of ten makes it difﬁcult to decide which institutions would preform best in production of goods and services Revealing Preference With Majority Voting - Majority voting can lead to inefﬁcient outcomes - Paradox of voting is society may not be able to rank its preferences consistently through majority voting - The median voting model suggests that under majority tule the median voter will determine th outcomes
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