Chapter 5 Governments Role and Government Failure Copyright

Chapter 5 Government’s Role and Government Failure Copyright © 2015 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Government’s Economic Role • Government’s right to coerce • Force and economic efficiency • Correcting for market failures • Positive externalities • Negative externalities • Reducing private-sector economic risks LO 1 5 -2

Directing and Managing Government • • • LO 1 No invisible Hand Massive Size and Scope The Need for Bureaucracy The Need for Paperwork and Flexibility The Information Aggregation problem Lack of Accountability 5 -3

Government Failure • Inefficient outcomes caused by government • Voting problems • Principal-agent problem • Special-interest effect • Rent seeking behavior LO 2 5 -4

Clear Benefits, Hidden Costs • Unfunded Liability • Social Security program • Medicare • Chronic budget deficits • Economic inefficiency • Debt Crisis • Balanced-budget laws LO 2 5 -5

Misdirection of Stabilization Policy • Two types of macroeconomic stabilization: • Fiscal policy • Monetary policy • Politicization of Fiscal and Monetary Policy • Central banks in charge of monetary policy LO 2 5 -6

Limited and Bundled Choice • Only two or three choices for candidates for election • Bureaucracy and Inefficiency • Public agencies less efficient than private businesses • The test of profit and loss • Government employees often gain political clout and bureaucrats justify their continued employment LO 2 5 -7

Inefficient Regulation and Intervention • Regulatory Capture • Railroad industry • Deregulation • Government’s poor investment track record • Loan guarantees • The Solyndra Subsidy • Socializing losses, privatizing gains LO 2 5 -8

Corruption • Abuse trusted powers for personal gain • Two basic forms of corruption: • Government official bribed to do part of his job • Government official demands a bribe to do something illegal LO 2 5 -9

Imperfect Institutions • Criticisms of public sector inefficiency • Markets and government are both imperfect • Difficult to assign a good or service to either the public sector or the private sector LO 2 5 -10