Deck 5: B: Governments Role and Government Failure

Question 1

Because of the force of law and bureaucratic structure, government accountability is less of a problem than in the private sector.

Answer 1

False

Question 2

A debt crisis refers to how much government spending exceeds tax revenues in a given year.

Answer 2

False

Question 3

Monetary policy attempts to change the level of spending by altering interest rates.

Answer 3

True

Question 4

The paradox of voting is that under majority voting rules the median voter decides the election outcome.

Question 5

Deregulation is seen as a solution to regulatory capture because it eliminates the regulatory agency that can or has been captured.

Question 6

Fiscal policy is more susceptible to politicization than monetary policy.

Question 7

Regulatory capture occurs when government exerts excessive control over an industry.

Question 8

The Ontario Securities Commission supervision of Bay Street financial firms is a possible example of regulatory capture.

Question 9

Changes in tax rates are a form of monetary policy.

Question 10

Government guarantees that socialize losses and privatize gains tend to encourage risky and imprudent investment.

Question 11

The size and scope of government inhibit the flow of information to decision makers, leading to inefficient outcomes.

Question 12

The problem of limited and bundled choices explains why many voters cannot fully express their political preferences.

Question 13

Economists widely support deregulation of industries that tend toward monopoly or generate substantial negative externalities.

Question 14

Government loan guarantees tend to socialize gains and privatize losses.

Question 15

The pursuit through government of a transfer of wealth at society's expense is called "rent seeking."

Question 16

Logrolling can either increase or diminish economic efficiency.

Question 17

Government's ability to enforce laws and contracts increases private-sector economic risks.

Question 18

The invisible hand guides government's economic activity just as it does with private economic activity.

Question 19

The principal-agent problem is a problem for the private sector but does not apply to political decision making.

Question 20

Even if a majority of the population wants a law and the law is passed, the outcome may still be economically inefficient.

Question 21

Weak government enforcement of contracts and laws tends to:

A)increase economic efficiency by minimizing government interference.
B)stimulate innovation and investment.
C)discourage economic activity by encouraging private-sector coercion such as blackmail and extortion.
D)not affect economic activity, as incentives for theft and deception are low.

Question 22

In corporations, owners are __________________ and managers are ________________.

A)agents; principals
B)stockholders; bondholders
C)agents; employees
D)principals; agents

Question 23

Which of the following is an activity of government that is not an activity of private firms?

A)Enforcing involuntary transactions.
B)Paying equitable wages.
C)Creating positive externalities.
D)Pursuing economic efficiency.

Question 24

Majority voting assures that government will provide a public good if it yields total benefits in excess of total costs.

Question 25

Which of the following is a key difference between the economic activities of government and those of private firms?

A)Private firms face the constraint of scarcity; government does not.
B)Government focuses primarily on equity; private firms focus only on efficiency.
C)Private economic activities create externalities; government activities do not.
D)Government has the legal right to force people to do things; private firms do not.

Question 26

As it relates to corporations, the principal-agent problem is that:

A)the goals of the corporate managers (the principals) may not match the goals of the corporate owners (the agents).
B)the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals).
C)the federal government (the agent) taxes both corporate profits and the dividends paid to stockholders (the principals).
D)it is costly for the corporate owners (the principals) to obtain a corporate charter from government (the agent).

Question 27

In a market economy, the government's power to coerce can:

A)undermine economic efficiency by increasing private-sector risk.
B)improve economic efficiency by directing all resources to their most valued uses.
C)reduce private-sector risk and increase economic efficiency.
D)cause significant negative externalities.

Question 28

Vote for my special local project and I will vote for yours.This political technique:

A)illustrates the paradox of voting.
B)is called "logrolling."
C)illustrates the median voter model.
D)undermines the benefits-received principle.

Question 29

Which of the following is a source of government failure?

A)The invisible hand.
B)The lack of bureaucracy in government.
C)The enormous size and scope of government.
D)Excessive flexibility.

Question 30

In what way, if any, does the invisible hand affect government resource allocation?

A)It enhances government efficiency by promoting competition for resources within government.
B)It does not help resource allocation, as there are no competitive forces within government that automatically direct resources to their best uses.
C)It rewards government bureaucrats who are most efficient at implementing public policies.
D)It reduces government efficiency by sending market signals that interfere with government decision making.

Question 31

As it relates to owners and managers, the principal-agent problem results from the:

A)separation of corporate ownership and control.
B)double taxation of corporate profit.
C)limited liability of corporate owners.
D)differing interests of corporate stockholders and bondholders.

Question 32

Information problems create inefficient outcomes in:

A)the private sector but not the public sector.
B)the public sector but not the private sector.
C)neither the private nor the public sector.
D)both the private and the public sectors.

Question 33

In representative democracy, voters are ____________ and politicians are ______________.

A)agents; principals
B)logrollers; principals
C)agents; employees
D)principals; agents

Question 34

Government officials tend to make:

A)better economic decisions than private individuals because of the wealth of information at their disposal.
B)better economic decisions than private individuals because of the efficient processes and flexibility built into the government bureaucracy.
C)inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs.
D)inefficient choices because the invisible hand directs them away from the resource allocation where marginal benefits equal marginal costs.

Question 35

The many layers of the federal government in Canada:

A)lead to economic inefficiencies because of difficulty aggregating and conveying information.
B)enhance government's ability make effective decisions quickly.
C)better allow the invisible hand to direct government resources to their best uses.
D)improve accountability of government officials, thus leading to more efficient policies.

Question 36

Individual accountability within the government bureaucracy:

A)tends to be greater than in private firms, making government more efficient than private firms.
B)is not a problem because government bureaucrats are not affected by the self-interest that affects private sector individuals.
C)is easy to monitor because of the small size and scope of government.
D)tends to be lacking because of civil service protections and the complexity of government.

Question 37

The government's ability to coerce can enhance economic efficiency by:

A)eliminating income inequality.
B)correcting market failures.
C)preventing resources from going to their most valued uses.
D)restraining self-interest.

Question 38

The government of Southland wants to improve resource allocation in the country.Which of the following actions by the Southland government is most likely to accomplish this?

A)Weakening enforcement of laws and contracts.
B)Promising to cover every risk of loss for private firms.
C)Coercing all firms to innovate and invest.
D)Taxing polluters and subsidizing firms that are creating significant positive externalities.

Question 39

As it relates to the political process, the principal-agent problem results from the:

A)negative externalities that are created by some policy actions.
B)political rules that encourage elected officials to engage in unethical and illegal behavior.
C)inconsistency between voters' interest in programs and politicians' interest in reelection.
D)paradox of voting.

Question 40

How does government's power to coerce behavior tend to reduce private-sector risk?

A)By enforcing contracts and discouraging illegal behavior that threatens private property.
B)By guaranteeing that the government will financially cover any losses by private-sector firms.
C)By strictly regulating the allocation of most property resources in the economy.
D)The coercive power of government only increases private-sector risk.

Question 41

A government using fiscal policy in an attempt to stimulate the economy would do which of the following?

A)Raise taxes.
B)Raise interest rates.
C)Lower interest rates.
D)Raise government spending.

Question 42

A special-interest issue is one whose passage yields:

A)private benefits equal to external benefits.
B)large external benefits compared to private benefits.
C)small economic losses to a small number of people and large economic losses to a large number of people.
D)large economic gains to a small number of people and small economic losses to a large number of people.

Question 43

Government fiscal policy involves changing which of the following?

A)Interest rates.
B)Taxes and government spending.
C)Regulations on business.
D)The amount of money in circulation.

Question 44

Suppose Canadian winemakers convince the federal government to issue a directive to serve only domestically produced wine at government functions.This would be an example of:

A)moral hazard.
B)the principal-agent problem.
C)logrolling.
D)rent-seeking behavior.

Question 45

Government's unfunded liabilities:

A)result from the political bias toward immediate benefits and deferred costs.
B)result in more efficient policies in an attempt to satisfy these liabilities.
C)are caused primarily by market failures.
D)only occur in democratically elected governments.

Question 46

Economists call the pursuit of a transfer of wealth through government at someone else's expense:

A)the paradox of voting.
B)adverse selection.
C)rent-seeking behavior.
D)the benefits-received principle.

Question 47

To reduce politicization of policy making, many countries have given control of ________ to politically independent central banks.

A)fiscal policy
B)monetary policy
C)unfunded liabilities
D)budget deficits

Question 48

Factors that impede the attainment of economic efficiency in the public sector are called:

A)market failures.
B)externalities.
C)government failures.
D)voting irregularities.

Question 49

The political tendency to favor spending priorities with immediate benefits but deferred costs results in:

A)chronic budget deficits.
B)misdirection of stabilization policy.
C)unfunded liabilities.
D)all of these.

Question 50

The Bank of Canada, U.S.Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank are all in charge of what for the countries they represent?

A)Debt management.
B)Unfunded liabilities.
C)Monetary policy.
D)Fiscal policy.

Question 51

The idea of government failure includes all of the following except:

A)special-interest effect.
B)bureaucratic inefficiency.
C)pressure by special-interest groups.
D)extensive positive externalities from public and quasi-public goods.

Question 52

Government changes in interest rates to regulate the economy are part of:

A)monetary policy.
B)fiscal policy.
C)debt policy.
D)liability policy.

Question 53

Monetary stimulus is only helpful to an economy:

A)that is experiencing high inflation.
B)that is in recession.
C)experiencing significant negative externalities.
D)with few public goods.

Question 54

When a nation is in a debt crisis, the government's level of debt is so high that:

A)monetary policy is ineffective.
B)the government is unable to find willing lenders so it can continue borrowing.
C)it can only be solved with a fiscal stimulus of lower taxes and more government spending.
D)other countries will be unwilling to buy goods and services from the nation.

Question 55

The pursuit through government of a "transfer of wealth" at someone else's expense refers to:

A)logrolling.
B)rent-seeking behavior.
C)the paradox of voting.
D)the median-voter model.

Question 56

Chronic budget deficits can be attributed to:

A)unfunded liabilities.
B)voters wanting government programs but not wanting to pay taxes.
C)inappropriate monetary policy.
D)state budget laws.

Question 57

Public choice economists contend public bureaucracies are inefficient primarily because:

A)the value of public goods is more easily measured than is the value of private goods.
B)of the absence of competitive market pressures.
C)public sector workers are more security-conscious than are private sector workers.
D)relatively low pay in government attracts workers of lesser quality.

Question 58

Public choice theorists contend that:

A)government can efficiently correct instances of market system failure.
B)the existence of cost-benefit analysis has brought about the efficient use of resources in the public sector.
C)public bureaucracies are inherently more efficient than private enterprises.
D)public bureaucracies are inherently less efficient than private enterprises.

Question 59

Which of the following impacts would economists expect to result from chronic budget deficits?

A)Greater economic efficiency resulting from the abundance of public goods produced.
B)Permanently high levels of output and continued economic growth.
C)Greater political control over monetary policy.
D)Government control of an inefficiently large share of the economy's resources.

Question 60

Public choice economists hold that politicians will:

A)favor programs entailing immediate and clear-cut costs and vaguely defined or deferred benefits.
B)follow policies leading to an optimal allocation of resources between public and private sectors.
C)favor programs entailing immediate and clear-cut benefits and vaguely defined or deferred costs.
D)objectively weigh the costs and benefits of various government programs and vote accordingly.

Question 61

The Road Runner Club contributes money to Senator Sly's reelection campaign fund, and Senator Sly helps pass legislation to add more jogging paths across the state.From this we can definitively conclude:

A)that political corruption has occurred.
B)that logrolling has occurred.
C)that a principal-agent problem has occurred.
D)nothing; the Road Runner Club may have donated to Senator Sly because he already supported the jogging paths.

Question 62

Suppose lawyers seek legislation to limit the use of computer software that enables people to use their personal computers to self-prepare their own wills, trusts, and other legal documents.This is an example of:

A)logrolling.
B)the principal-agent problem.
C)rent-seeking behavior.
D)limited and bundled choices.

Question 63

What is the main problem with government guarantees that socialize losses and privatize gains?

A)They encourage overly risky investments by insulating private investors from any losses.
B)The investments that do occur never generate production of goods underproduced by the private sector.
C)They discourage private investment in worthwhile projects.
D)They tend to benefit foreign companies at the expense of domestic firms.

Question 64

Regulatory capture is said to have occurred when which of the following is true?

A)Rules and enforcement in an industry are heavily influenced by the industry being regulated.
B)One firm controls an entire market, having captured customers away from other firms.
C)Government imposes excessive regulations in an industry, resulting in inefficiencies.
D)Consumers make all the rules for an industry, forcing firms into inefficient production methods.

Question 65

Proponents of deregulation point to all of the following industries as examples of successful deregulation except for:

A)airlines.
B)pharmaceuticals.
C)railroads.
D)interstate trucking.

Question 66

The field of economics that analyzes government decision making, politics, and elections is called:

A)public finance.
B)public choice theory.
C)collective economics.
D)political economy.

Question 67

According to some economists, the private sector is more efficient than the public sector mainly because:

A)the private sector has a clear test of performance: profit and loss.
B)wages, salaries, and fringe benefits are higher in the private sector.
C)worker turnover is higher in the public sector.
D)of extensive negative externalities in the public sector.

Question 68

When congressional representatives vote on an appropriations bill, they must vote yea or nay, taking the bad with the good.This statement best reflects the:

A)paradox of voting.
B)regulatory capture effect.
C)benefits-received principle.
D)concept of limited and bundled choices.

Question 69

Government loan guarantees tend to have the effect of:

A)socializing losses and privatizing gains.
B)socializing gains and privatizing losses.
C)socializing both gains and losses.
D)privatizing both gains and losses.

Question 70

Which of the following would best explain why regulatory capture is a problem?

A)The regulations implemented tend to reduce the profitability of the regulated industry and reduce global competitiveness.
B)Regulatory capture unduly increases the size and power of government, increasing costs for taxpayers.
C)Individuals implementing the regulations lack expertise about the industry and therefore make poor regulatory choices.
D)The regulations implemented serve the private interests of the regulated industry, rather than addressing social interests such as consumer safety and environmental protection.

Question 71

Under what circumstances would government loan guarantees be socially beneficial?

A)When the guarantees socialize losses and privatize gains.
B)When the guarantees stimulate production of goods generating significant spillover costs.
C)When the guarantees promote production of goods otherwise underproduced by the private sector.
D)When the guarantees increase company profits.

Question 72

In a sporting goods store, you can buy the equipment you want and not buy the rest.In an election, you "buy" the entire range of the candidate's positions, including some you may not agree with.This difference:

A)reflects limited and bundled choices in the public sector.
B)describes the paradox of voting.
C)describes the principal-agent problem in the public sector.
D)creates bureaucratic inefficiency in the public sector.

Question 73

Deregulation:

A)tends to improve outcomes in industries generating substantial negative externalities.
B)eliminates regulatory capture and can improve outcomes by increasing competition.
C)is most appropriate to undertake by government agencies responsible for human safety, financial regulation, and environmental protection.
D)always generates greater economic efficiency.

Question 74

Which of the following is considered a potential solution to some regulatory capture?

A)Bringing industry experts into the regulatory process.
B)Creating a standard set of regulations for all industries.
C)Deregulation of the industry.
D)Government subsidies for firms in the industry.

Question 75

Regulatory capture often occurs because of which of the following?

A)Government officials want stronger control over industry regulation.
B)Nearly everyone with expertise works in the regulated industry.
C)Patent law allows firms to gain monopoly power easily and therefore control a market.
D)Consumer groups are effective at lobbying the government for industry regulation.

Question 76

Political corruption occurs whenever:

A)logrolling is used to secure votes for controversial legislation.
B)government officials use unlawful misdirection of governmental resources for their own personal gain.
C)special interest groups contribute to elected officials, who in turn support legislation that benefits the special interest group.
D)there is pork barrel politics involved.

Question 77

Which of the following would be the best example of regulatory capture?

A)Starbucks buys up all the available supplies of coffee beans.
B)Nike executives influence the rules for track and field events.
C)Federal law makers write and pass legislation that protects domestic companies from foreign competition.
D)Executives from the Ford, General Motors, and Chrysler companies write the rules regulating automobile safety and fuel requirements.

Question 78

The unlawful misdirection of governmental resources for personal gain is known as:

A)political corruption.
B)logrolling.
C)adverse selection.
D)the special-interest effect.

Question 79

Which of the following will tend to socialize losses and privatize gains?

A)Lowering interest rates to encourage private borrowing and investment.
B)Government regulation to promote human safety and environmental protection.
C)Government creating projects rather than supporting private efforts.
D)Government guarantees to private investors that they will get their money back even if the company fails.

Question 80

Public choice theorists point out that the political process:

A)differs from the marketplace in that voters and congressional representatives often face limited and bundled choices.
B)is less prone to failure than is the marketplace.
C)is a much fairer way to allocate society's scarce resources than is the impersonal marketplace, which is dominated by high-income consumers.
D)involves logrolling, which is always inefficient.