Chapter 5

Government’s Role and Government Failure

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5-2

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

LO1

5-3

Directing and Managing Government

• No invisible Hand• Massive Size and Scope• The Need for Bureaucracy• The Need for Paperwork and Flexibility • The Information Aggregation problem • Lack of Accountability

LO1

5-4

Government Failure

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

LO2

5-5

Clear Benefits, Hidden Costs

• Unfunded Liability• Social Security program•Medicare

• Chronic budget deficits• Economic inefficiency •Debt Crisis• Balanced-budget laws

LO2

5-6

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

LO2

5-7

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

LO2

5-8

Inefficient Regulation and Intervention

• Regulatory Capture • Railroad industry• Deregulation

• Government’s poor investment track record• Loan guarantees • The Solyndra Subsidy • Socializing losses, privatizing gains

LO2

5-9

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

LO2

5-10

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

LO2

5-11

Global Perspective

LO2

5-12

“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