Chapter 5: Government's Role in Government Failure

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

It does not help resource allocation, as there are no competitive forces within government that automatically direct resources to their best uses

The 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?

Monetary policy

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?

Taxing polluters and subsidizing firms that are creating significant positive externalities

From an economist's perspective, when is government too big?

When the marginal costs from additional government spending exceed marginal benefits

"Earmarks" refer to

authorized expenditures benefiting a narrow, specifically designated group that are included in more comprehensive spending legislation

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

inconsistency between voters' interest in programs and politicians' interest in reelection

Government officials tend to make

inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs

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

reduce private-sector risk and increase economic efficiency

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

reflects limited and bundled choices in the public sector

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

rent-seeking behavior

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

the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals)

Government passes a law requiring all domestic clothing factories to pay workers at least $20 per hour. As a result, domestic clothing companies move their operations overseas, leaving domestic workers unemployed. This situation illustrates the problem of

unintended consequences