Chapter 5 Governments Role and Government Failure Mc

Chapter 5 Government’s Role and Government Failure Mc. Graw-Hill/Irwin Copyright © 2015 by Mc. Graw-Hill Education. All rights reserved.

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

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

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

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

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

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

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

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

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

Global Perspective LO 2

“Government Failure” in the News • FEMA made payouts for hurricane Katrina victims on as many as 900, 000 claims that contained invalid social security numbers or false names and addresses • A 2011 audit revealed that the Federal government had paid $600 million in retirement benefits to deceased Federal retirees • In 2011, $765, 828 was spent to subsidize an IHOP restaurant and $113, 277 to aid in historical preservation of video games