ECO Chapter 6

The theory of public choice

(1) analyzes the likelihood that various public sector alternatives will be instituted. (2) assumes that economic incentives influence the choices of voters. (3) applies the tools of economics to the collective decision-making process

The major categories of federal government spending are

(1) health care (2) national defense (3) Social Security (4) other income transfers.

what are the four major sources of market failure ?

(1) lack of competition (2) externalities (3) public goods (4) poor information

what are the four major sources of government failure?

(1) the speical interest effect (2) the shortsightedness effect (3) rent-seeking (4) weak incentives for operational efficiency

Assume that you are a member of the U.S. House of Representatives from your home state and district. Which of the following best explains why you have a strong incentive to get the federal government to finance pork-barrel projects in your district? a. Most of the benefits of pork-barrel projects within your district will accrue to your constituents, while most of the costs will be imposed on voters from other districts. b. Most of the costs of pork-barrel projects within your district will be imposed on your constituents, while most of the benefits will accrue to voters from other districts. c. Pork producers are a powerful political lobby that will influence the actions of legislators in all districts. d. This is a trick question; in a representative democracy, there is little incentive for legislators to support pork-barrel projects.

(a) Most of the benefits of pork-barrel projects within your district will accrue to your constituents, while most of the costs will be imposed on voters from other districts

Which of the following is a distinguishing characteristic of a user charge? (a) Persons pay roughly in proportion to the extent that they use the good or service. (b) Persons with high incomes pay a larger amount than persons with lower incomes for the same good or service. (c) Persons with high incomes pay a larger percentage of their income than persons with lower incomes for the same good or service. (d) Persons with high incomes pay a smaller percentage of their income than persons with lower incomes for the same good or service.

(a) Persons pay roughly in proportion to the extent that they use the good or service.

Which of the following statements is False? a. Political activities consistent with economic efficiency tend to emerge naturally from the unconstrained democratic political process. b. Constitutional rules establishing procedures and limiting the ability of the political process to engage in redistributive activities can improve the economic efficiency of government. c. Rent-seeking activity tends to retard the economic prosperity of a nation because it takes resources away from productive private sector activities. d. Unconstrained democratic governments often enact special-interest programs that waste resources and impair the standard of living of a country.

(a) Political activities consistent with economic efficiency tend to emerge naturally from the unconstrained democratic political process.

Which of the following is true? (a) The incentives to engage in rent-seeking activities increase with the ease with which the political process can provide personal gain at the expense of others. (b) The amount of resources devoted toward rent seeking generally has no impact on the economic prosperity of a nation. (c) Income transfers directed toward the poor constitute about half of all income transfers in the United States. (d) All of the above are correct.

(a) The incentives to engage in rent-seeking activities increase with the ease with which the political process can provide personal gain at the expense of others.

In which of the following situations is representative democracy most likely to lead to the adoption of an inefficient government program? (a) The program provides substantial benefits to a small interest group, and the costs are widespread among voters. (b) Both the benefits and costs of the program are widespread among voters. (c) The program is financed by a user charge that makes the individuals who benefit from the program pay for its cost. (d) The program provides widespread benefits to all voters and imposes a significant cost on a small interest group.

(a) The program provides substantial benefits to a small interest group, and the costs are widespread among voters.

Which of the following is true of government activities under a system of representative democracy? a. When voters pay in proportion to benefits received, all voters will gain if the government activity is productive. b. If a majority opposes an activity, it must be counterproductive. c. When voters must pay in proportion to benefits received for an activity undertaken by the government, the activity will most likely be rejected by the majority of voters. d. Government activities must be productive in order to be eligible for vote.

(a) When voters pay in proportion to benefits received, all voters will gain if the government activity is productive.

Which of the following is true about the market and public sectors? a. Competitive behavior is present in both sectors. b. The public sector utilizes the price mechanism more than the private sector. c. In both sectors, individuals always pay for the goods and services they consume. d. There is more free choice for individual consumers in the public sector than in the private sector

(a) competitve behavior is present in both sectors

In the case of a private good, which of the following forms of economic organization will result in the strongest incentive for consumers and producers to economize? a. The good is produced privately and taxes are used to provide it to consumers free of charge. b. The good is produced privately and consumers purchase it with their own money. c. The good is produced by government enterprises and the cost of its production is covered by taxes. d. The good is produced by government enterprises and consumers purchase it with their own money.

(b) The good is produced privately and consumers purchase it with their own money.

Which of the following is an example of a transfer payment? (a) wages paid to military personnel (b) benefits paid to Social Security recipients (c) purchase of aircraft by the Department of Defense (d) payments made to a contractor for construction of a highway

(b) benefits paid to social security

Which of the following is true of government activities under a system of representative democracy? (a) If a majority favors an activity, it must be productive. (b) If a majority opposes an activity, it must be counterproductive. (c) When voters pay in proportion to benefits received, productive activities undertaken by the government will be favored by an overwhelming majority of voters. (d) When voters pay in proportion to benefits received, productive activities will generally be defeated under a majority rule vote.

(c) When voters pay in proportion to benefits received, productive activities undertaken by the government will be favored by an overwhelming majority of voters.

Which of the following is an example of a good that is produced by the public sector but consumers purchase it in proportion to the benefit received? a. milk b. public education c. first-class mail delivery from the U.S. Post Office d. national defense

(c) first-class mail delivery from the US post office

Which of the following is legally permitted to use coercive force to modify the actions of adults against their will? a. banks b. corporations c. governments d. all of the above

(c) governments

Legislation that offers immediate and easily recognized benefits, at the expense of costs that are observable only in the distant future, is often enacted, even when economic inefficiency results. In economics this is referred to as the a. long-term effect. b. political-fallacy effect. c. shortsightedness effect. d. inefficiency effect.

(c) shortsightedness effect`

Which of the following groups does the quotation in Scenario 6-1 suggest would have the most influence on public sector action? a. taxpayers b. nonunion workers c. special interest groups d. consumers

(c) special interest groups

Despite many differences, the market and public sectors are similar in which one of the following respects? a. In both sectors, income (or power) is distributed on the basis of the same criterion. b. Consumers in the market sector and voters in the public sector are equally well informed. c. Voluntary exchange, rather than compulsion, is characteristic of both sectors. d. It will be costly to use scarce goods, whether through the private or the public sector.

(d) It will be costly to use scarce goods, whether through the private or the public sector.

Which of the following is a predictable side effect of increased government activity (for example, taxes and subsidies) designed to redistribute income among citizens? a. improvement in the operational efficiency of government agencies b. rapid economic growth c. a reduction in the amount of lobbying d. an increase in rent-seeking activity

(d) an increase in rent-seeking activity

Which of the following factors weakens the case for private-sector provision of goods and services as opposed to public-sector provision? a. weak incentives for operational efficiency b. rent-seeking c. the shortsightedness effect d. externalities

(d) externalities

According to the Bureau of Economic Analysis, government income transfer payments amounted to approximately what percent of national income?

16%

Which economists has played a central role in the development of the "economics of collective decision making," better known as public choice analysis?

James Buchanan

Assume that you are a member of the U.S. House of Representatives from your home state and district. Which of the following best explains why you have a strong incentive to get the federal government to finance pork-barrel projects in your district?

Most of the benefits of pork-barrel projects within your district will accrue to your constituents, whereas most of the costs will be imposed on voters from other districts

Economists use the term shortsightedness effect to describe which one of the following phenomena?

Politicians tend to support actions that have immediate and easily recognized current benefits.

When voters pay in proportion to the benefits received from an economic action of the government, if the government activity is productive

all voters gain

Which of the following is a predictable side effect of increased government activity (e.g., taxes and subsidies) designed to redistribute income among citizens?

an increase in rent-seeking activity

Public choice analysis

assumes individuals in the public sector act in their own self-interests.

A special-interest issue is one that

benefits a small, well-organized interest group at the expense of taxpayers or consumers.

Public choice analysis indicates that politicians will find

budget deficits more attractive than budget surpluses.

Crony capitalism is present when

businesses either implicitly or explicitly provide political decision-makers with contributions and other forms of political support in "exchange" for government favors that will improve their profitability.

When the government both provides a service and covers its costs through taxation,

consumers are in a weak position to either discipline the suppliers or alter the quantity or quality of the service provided.

According to the economic way of thinking, personal benefits and costs influence the actions of

consumers, producers, voters, and politicians in both the private and the public sectors.

"The ideal policy, from the viewpoint of the state, is one with identifiable beneficiaries, each of whom is helped appreciably, at the cost of many unidentifiable persons, none of whom is hurt very much." (George Stigler, A Dialogue on the Proper Economic Role of the State) This statement is probably

correct because voters who have a strong personal interest in an issue will tend to support candidates who cater to their views, whereas most other voters ignore the issue.

From the standpoint of society as a whole, rent seeking is

counterproductive because it takes resources away from the creation of wealth in the private sector.

a situation where the institutions of markets are maintained but the allocation of resources and the profit and loss of businesses are determined by political decision making rather than consumer purchases and market forces

crony capitalism

Government decisions tend to be biased toward actions that have

current benefits that are easily observable and future costs that are difficult to identify.

Government decisions tend to be biased against actions that have

current costs that are easily observable and future benefits that are difficult to identify.

Public choice theory suggests that politicians will be most likely to favor redistribution of income from

disorganized individuals to well-organized special interest groups.

Senator Spendall is able to use his position on an important committee to set aside government funding specifically for a new bridge in his hometown. This is an example of

earmarking

Public choice analysis suggests that bureaucrats and public-sector managers have a strong incentive to

expand their budgets to sizes beyond what would be considered economically efficient.

Giving local governments more power is less dangerous than giving the same power to the national government because

higher exit options exist at the local level--it is easier for people to move away from a bad local government.

Economic theory leads us to expect that the typical voter will be uninformed on many issues because

information is costly, and the individual voter casting a well-informed vote can expect negligible personal benefit.

Public choice theory indicates that the behavior of people in government

is best understood by applying the same principles we use to predict the behavior of people in the private sector.

At the most basic level, the distinguishing characteristic of government that makes it different from private firms is

its ability to use coercive force against people to modify their behavior or force them to pay for a good or service whether they benefit from it or not.

The rational-ignorance effect refers to the

lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election.

The term pork-barrel legislation refers to

legislation that bundles together a number of projects, each benefiting local interests at the expense of general taxpayers

Which of the following refers to when legislators trade votes on legislation?

logrolling

the exchange between politicians of political support on one issue for political support on another

logrolling

Despite being a college graduate, Ethan cannot name any of his representatives in Congress and he has no idea which issues are being debated and voted on this week in Congress. According to public choice analysis, Ethan is

making a rational personal choice because knowing these things gives him little personal benefit.

Legislators often gain by bundling a number of projects benefiting local districts at the expense of general taxpayers. Such legislation is called

pork-barrel legislation

a package of spending projects bundled into a single bill

pork-barrel legislation

often used as a device to obtain funding for a group of projects intensely desired by regional or interest groups that would be unlikely to pass if voted on separately

pork-barrel legislation

The branch of economics that applies the principles and methodology of economics to the operation of the political process is known as

public choice analysis

the study of decisions making as it affects the formation and operation of collective organizations, like governments

public-choice analysis

because it is highly unlikely that an individual vote will decide the outcome of an election, a rational individual has little or no incentive to search for and acquire the information needed to cast an informed vote

rational ignorance effect

Economists refer to the lack of incentive that voters have to search for and obtain information to help make better political choices as the

rational-ignorace effect

In 2006, the American Association of Retired Persons (AARP) spent over $70 million on lobbying-related expenses in an attempt to get policies enacted that would benefit retirees. In economics, the term used to describe such activity is

rent seeking

Actions by individuals and groups designed to restructure public policy in a manner that will either directly or indirectly redistribute more income to themselves or the projects they promote

rent-seeking

As more politically directed spending leads to more rent-seeking activity,

resources will be channeled toward unproductive activity and away from productive activity.

When analyzing public sector decision making, economic theory assumes that voters, politicians, and government officials will

respond to changes in personal benefits and costs when making public sector choices.

the misallocation of resources that results because public-sector action is biased

shortsightedness effect

When politicians support policies that benefit small interest groups, such as farmers, at the expense of unorganized, widely dispersed groups, for example, taxpayers or consumers, this is a reflection of the

special-interest effect

an issue that generates substantial individual benefits to a small minority whil imposing a small individual cost on many other citizens

special-interest issue

Restrictions that limit sugar imports, subsidies for the construction of sports stadiums, and federal spending on programs like the construction of an indoor rain forest in Iowa all provide examples of government programs

that reflect the political attractiveness of special-interest issues.

The term logrolling describes

the exchange between legislators of their votes on issues

Legislation that offers immediate and easily recognized benefits, at the expense of uncertain costs that are in the distant future (such as financing by government debt), is often enacted even when economic inefficiency results. This can be expected because of

the shortsightedness effect

A politician may be considered an entrepreneur in the sense that

the successful politician discovers and offers voters political goods when voter demand is strong for him.

Market allocation and the political process differ in that

there is a one-to-one link between payment for and receipt of a good in the market sector, but this is often not true in the political sector.

payments to individuals or institutions that are not linked to the current supply of a good or service by the recipient

transfer payment

Transfer payments are

transfers of income from taxpayers to recipients who do not provide current goods and services for the payments

Public choice analysis indicates that

unconstrained democratic governments often enact special-interest programs that waste resources and impair the standard of living

At the most basic level, the distinguishing characteristic of government that makes it different from private firms is its ability to

use coercive force against adults to modify their behavior or force them to pay for a good or service.

A local government operates a city recreation center with a pool and tennis courts. The center is financed through $50 annual membership fees (required for members to use it). This type of financing is an example of a

user change

payments users (consumers) are required to make if they want to receive certain services provided by the government

user charges

In which case is the political process most likely to result in the acceptance of productive programs and rejection of unproductive political activities?

when both the benefits and costs are widespread among voters

When is representative democracy most likely to lead to the adoption of an inefficient government program?

when the program provides substantial benefits to a small proportion of voters and the costs are widespread among voters

Public choice theory indicates that competitive forces between candidates in elections provide a politician with a strong incentive to offer voters a bundle of political goods that she believes

will increase her chances of winning elections