Advantages to Government's right to coerce
1. Correcting market failures: Gov can improve economic efficiency from positive externalities by using involuntarily collected tax money to subsidize production. Can help negative externalities by using involuntary policies like direct controls, pollutio
Challenges with directing and managing government
1. No invisible hand
2. Massive size and scope
3.The need for bureaucracy
4. The need for paperwork and inflexibility
5. The information aggregation problem
6. Lack of accountability
government failure
Refers to economically inefficient outcomes caused by shortcomings in the public sector. Occur because 1.voting problems (driven by a lack of information about voter preferences)
2. Incentive structures facing government officials
Principal agent problems
Conflicts that arise when tasks are delegated by one group of people to another group of people. Conflicts arise because the interests of the agents may not be the same as the interests of the principals. Often arise because politicians have goals (reelec
Special interest effect
Any outcome of the political process whereby a small number of people obtain a government program or policy that gives them large gains at the expense of a much greater number of persons who individually suffer small losses. The large number of people are
pork-barrel politics
Securing a government project that yields benefits mainly to a single political district and its political representative.
Earmarks
Narrow, specifically designated authorizations of expenditure
Rent seeking
The appeal to government for special benefits at taxpayers' or someone else's expense. Those engaged in this are attempting to use government influence to get themselves into a situation in which they will get paid more for providing a G or S than the min
unfunded liability
A government creates this when it commits to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures. Eg. Social Security and Medicare programs.
Budget deficit
A government runs this whenever its tax revenues are less than its spending during a particular year. Chronic deficits can be because of Conflicting incentives that confront politicians
Problems of chronic deficits
1. Economic inefficiency: Tendency to underproduce private goods and overproduce public goods. Results in a decrease in productive and allocative efficiency.
2. Debt crises: Investors may lose faith in the government's ability/willingness to repay its deb
Debt crisis
The government is unable to borrow any more money because investors lose faith in the government's ability/willingness to repay its debts. Government is then forced to undertake some combo of drastic tax increases or spending cuts.
Fiscal policy
attempts to use changes in tax rates and spending levels to offset the business cycle.
Monetary policy
Attempts to use changes in interest rates to regulate the economy. (Uses its control over the money supply)
regulatory capture
A government agency that is supposed to supervise a particular industry will suffer from this if its regulations and enforcement activities come to be heavily influenced by the industry that it is supposed to be regulating.
Deregulation
One potential solution to regulatory capture. Involves intentionally removing most or even all of the regulations governing an industry. Solves the problem of regulatory capture because there is no agency left to capture. Only works well if the deregulate
loan guarantees
When the government subsidizes private sector investments. The government has found to have low returns when it does this. Eg. Solyndra
Political corruption
The unlawful misdirection of governmental resources or actions that occurs when government officials abuse their entrusted powers for personal gains. (Government official is bribed or demands a bribe)