Chapter 5 Econ

budget deficit

run when a government's tax revenues are less than its spending during a particular year

pork barrel politics

securing a government project that yields benefits to a single political district and its political representatives.

earmarks

such narrow specifically designated authorizations of expenditure. (when a special spending addition is tacked on to a bill)

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 # of persons who individually suffer small losses

Describe how government's power to coerce can be economically beneficial and list of the difficulties associated with managing and directing the government.

The government is able to correct market failures using its legal right to coerce. It is difficult to manage or direct the government because it is such a big entity. (1. no invisible hand, the free market will not be able to correct resource allocation errors 2. the massive size and scope 3. need for bureaucracy and leads to inefficiencies 4. lots of paper work and inflexibility to make sure all laws are followed 5. information aggregation problem, hard to share info across different agencies 6. lack of accountability, hard to get fired.)

Discuss "government failure" and why it happens

The main cause of government failure is special interest. When one person acts on his own behalf at the expense of many others (political corruption), the government begins to fail. As long as the costs of organizing an opposition exceeds the cost of the general suffering, the unpopular policy will stay in place.

monetary policy

attempts to use changes in interest rates to regulate the economy

fiscal policy

attempts to use changes in tax rates and spending levels to offset the business cycle

Principal-agent problems

conflicts that arise when tasks are delegated by one group of people (principles/owners) to another group of people (agents/managers)

unfunded liability

created when a government commits to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures

Government Failure

economically inefficient outcomes caused by shortcomings in the public sector

deregulation

intentionally removing most or even all of the regulations governing an industry

unintended consequences

offset some or all of the intended benefits

what is the basis of government economic failure

rent seeking behavior, principal-agent problems, special interest effects

collective-action problem

the fact that larger groups are more difficult to organize and motivate than smaller groups

loan guarantees

the government also tends to earn low or negative returns when it subsidizes private sector investments with loan guarantees

regulatory capture

the intended benefits

rent seeking behavior

to appeal to the government for special benefits at taxpayers or someone else's expense

political corruption

unlawful misdirection of governmental resources or actions that occurs when government officials abuse their interested powers for a personal gain.

debt crisis

when a government is unable to borrow any more money