Chapter 5. Government’s Role and Government Failure

Chapter 5Government’s Role and Government FailureCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Government’s Economic RoleGovernment’s right to coerce Force and economic efficiency Correcting for market failuresPositive externalities Negative externalities Reducing private-sector economic risksLO1Directing and Managing Government No invisible HandMassive Size and ScopeThe Need for BureaucracyThe Need for Paperwork and Flexibility The Information Aggregation problem Lack of Accountability LO1Government FailureInefficient outcomes caused by governmentVoting problemsPrincipal-agent problemSpecial-interest effectRent seeking behaviorLO2Clear Benefits, Hidden CostsUnfunded LiabilitySocial Security programMedicare Chronic budget deficitsEconomic inefficiency Debt CrisisBalanced-budget laws LO2Misdirection of Stabilization PolicyTwo types of macroeconomic stabilization:Fiscal policyMonetary policy Politicization of Fiscal and Monetary Policy Central banks in charge of monetary policyLO2Limited and Bundled ChoiceOnly two or three choices for candidates for electionBureaucracy and Inefficiency Public agencies less efficient than private businessesThe test of profit and lossGovernment employees often gain political clout and bureaucrats justify their continued employment LO2Inefficient Regulation and InterventionRegulatory Capture Railroad industryDeregulation Government’s poor investment track recordLoan guarantees The Solyndra Subsidy Socializing losses, privatizing gains LO2CorruptionAbuse trusted powers for personal gain Two basic forms of corruption: Government official bribed to do part of his jobGovernment official demands a bribe to do something illegalLO2Imperfect Institutions Criticisms of public sector inefficiencyMarkets and government are both imperfectDifficult to assign a good or service to either the public sector or the private sector LO2