Macroeconomics 21st edition mcconnell solutions manual 1

Chapter 05 - Government's Role and Government Failure

Solution Manual for Macroeconomics 21st Edition McConnell Brue Flynn 1259915670 9781259915673 Download full solution manual at: https://testbankpack.com/p/solution-manual-for-macroeconomics21st-edition-mcconnell-brue-flynn-1259915670-9781259915673/ Download full test bank at: https://testbankpack.com/p/test-bank-for-macroeconomics-21stedition-mcconnell-brue-flynn-1259915670-9781259915673/

Chapter 05 - Government's Role and Government Failure McConnell Brue Flynn 21e

DISCUSSION QUESTIONS 1. Why might citizens interested in maximizing economic efficiency be happy to invest their government with the right to coerce them in at least some situations? LO1 Answer: The government’s ability to coerce allows it to correct for market failures and to enforce laws that reduce risks for those engaging in economics transactions. With respect to market failures, the government can use its power to tax, to collect the money necessary to pay for public goods and to subsidize the production of products that offer positive externalities. With respect to reducing risk, the government can use its power to coerce, to both threaten and then punish those engaging in fraud, extortion, and other unethical business practices as well as to enforce environmental, health, and safety regulations.

2. Jean Baptiste Colbert was the Minister of Finance under King Louis XIV of France. He famously observed, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” How does his comment relate to special interests and the collective-action problem? LO2 Answer: The logic above applies to special interests and collective action as well. In the case of special interest and collective action, the large gains to the smaller group 5-1 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 05 - Government's Role and Government Failure

motivates these individuals to be more active politically and financially than the larger group who faces small losses at the individual level. That is, the smaller group will extract resources from the larger group until it is no longer politically feasible.

3. What is rent seeking and how does it differ from the kinds of profit maximization and profit seeking that we discussed in previous chapters? Provide an actual or hypothetical example of rent seeking by firms in an industry. By a union. By a professional association (for example, physicians, school teachers, or lawyers). Why do elected officials often accommodate rentseeking behavior, particularly by firms, unions, and professional groups located in their home states? LO2

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Chapter 05 - Government's Role and Government Failure

Answer: Rent-seeking is an appeal to the government for special benefits at taxpayers or someone else's expense. The term 'rent' refers to any payment is excess of the minimum amount that is necessary to keep the resource employed in its current use.

Rent-seeking is different from profit maximization because rent-seeking attempts to influence the political process to gain increased profit or income. Standard profit maximization and profit seeking is driven by market forces, such as new products, cost minimization, etc...

Examples will vary. An industry may try to block imports explicitly or implicitly using tariffs and/or non-tariff barriers. Canada's beef producers might argue that they are concerned about mad-cow disease to block imports of U.S. beef. A union may restrict access to employment or negotiate as a block to keep wages higher than the market wage.

Professional associations may require certification and testing to actively participate in the market.

These groups tend to be politically more active and willing to spend resources supporting individuals who support their respective objectives. Thus, a politician is likely to support their activities.

4. How does the problem of limited and bundled choice in the public sector relate to economic efficiency? Why are public bureaucracies possibly less efficient than firms? LO2 Answer: Limited and bundled choice in the political process tends to reduce economic efficiency because blocks of public goods and social programs are provided. That is, instead of evaluating each public good and social program on its respective costs and benefits the politician chooses all programs together. Some of these goods and programs may benefit society (positive net benefits), but others may hurt society (negative net benefits).

The private market is driven by profit. If a company continues to lose money or produces a good that society does not want it goes out of business. If the public sector, a bureaucracy, fails to use its resources efficiently then the market is not there to discipline it. In this case, the bureaucracy continues to operate inefficiently and may actually grow in size in an attempt to 'fix' the inefficiency. However, we need to look carefully at the logic underlying this argument. Most bureaucratic operations do not provide private goods. They provide public goods and social services that correct potential market failures through regulation and direct provision. Thus, the market analogy may not apply.

5. Discuss the political incentives that helped motivate federal politicians to approve budget deficits in all but five years between 1960 and 2015. LO2 Answer: Voters like the benefits of increased government spending, but do not like having to pay the taxes necessary to fund all the costly government programs that they like. So, politicians have a political incentive to support high levels of spending by only moderate levels of taxation. A common result is budget deficits, as those political tendencies promote situations in which spending exceeds tax revenues. To bridge the gap, governments borrow money, usually by selling bonds.

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Chapter 05 - Government's Role and Government Failure

6. Explain: “Politicians would make more rational economic decisions if they weren’t running for reelection every few years.” LO2 Answer: Because political officeholders must seek voter support every few years, they favor programs with immediate and clear-cut benefits and with vague or deferred costs. Conversely, politicians will reject programs with immediate and easily identifiable costs but with long term, less measurable benefits. Such biases can lead politicians to reject economically justifiable programs and to accept programs that are economically irrational.

Politicians may make these and other irrational decisions in order to curry favor with the voters. But what kind of irrational decisions might be made by politicians who did not have to face the voters again and stand for reelection?

7. Critique: “Thank goodness we have so many government regulatory agencies. They keep Big Business in check.” LO2 Answer: Government regulatory agencies sometimes fall under the sway of the industries that they are supposed to be regulating. Those instances of “regulatory capture” imply that this statement is overly confident in the ability of government regulatory agencies to keep powerful businesses in check. If regulatory capture occurs, the captured regulator ceases to be a truly independent watchdog looking out for the better interests of the public. Instead, it often imposes regulations that reduce competition and promote high levels of profit in the “regulated” industry.

8. LAST WORD How do the concepts of pork-barrel politics and logrolling relate to the

items listed in the Last Word?

Answer: Both of these political techniques are examples of special interest effects. “Pork-barrel” politics refers to the practice that congressional representatives follow when they obtain unneeded benefits for their own districts, and “logrolling” is a related practice whereby one group of legislators helps another with the understanding that at some point in the future they, in turn, will be helped.

The Last Word contains some examples of public spending that undoubtedly resulted from such practices. These include the purchasing of equipment that is not asked for by the military and buying equipment from a single firm both to benefit particular Congressional districts; building projects that are outlandishly costly; and appropriations bills that are so large, contain so much detail, with provisions that benefit small groups or individuals.

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Chapter 05 - Government's Role and Government Failure

REVIEW QUESTIONS 1. Select all of the following that are true. To an economist, a coercive government can be useful in order to: LO1 a. Reallocate resources in order to improve efficiency. b. Fight negative externalities. c. Ensure low gasoline prices. d. Provide a low-risk economic environment for individuals and firms.

Answer: The government's ability to coerce allows it to correct for market failures and to enforce laws that reduce risks for those engaging in economic transactions.

2. To an economist, any government program is too big if an analysis of that program finds that MB _______ MC. LO1 a. Is greater than b. Is less than c. Is equal to d. Is less than twice as large as e. Is more than twice as large as Answer: a, less than.

As with other resource allocation decisions, government programs should only be expanded up to the point where MB=MC. They are expanded further so that MB<MC, then they are too big and should be shrunk.

3. Tammy Hall is the mayor of a large U.S. city. She has just established the Office of Window Safety. Because windows sometimes break and spray glass shards, every window in the city will now have to pass an annual safety inspection. Property owners must pay the $5-per-window cost—and by the way, Tammy has made her nephew the new head of the Office of Window Safety. This new policy is an example of: LO2 a. political corruption b. earmarks c. rent seeking d. adverse selection

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