ECON 2013 Chapter 6

Two concepts that are present in both the political and market process

1. Competitive behavior 2. Scarcity

Four key differences between the political and market process

1. Public sector organizations can break the individual consumption-payment link 2. Private sector action is based on mutual agreement; public sector (when democratic) is based on majority rule 3. When collective decisions are made legislatively, voters must choose among candidates who represent a bundle of positions on issues 4. Income and influence are distributed differently in the two sectors

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

16 percent

Crony capitalism

A system in which close friends of a political leader are either legally or illegally given business advantages in return for their political support.

Rent-seeking

Actions done 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.

What are two examples of crony capitalism

Agriculture subsidies: Each year, the farming industry spends tens of millions of dollars on lobbying, focused largely on crop insurance. The Federal Reserve: A private bank takes over all control of a country's monetary system, it then prints that money out of thin air and lends it to the country.

Logrolling

An agreement by two or more lawmakers to support each other's bills

Transfer payments

Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as social security payments and retirement payments to former government employees, or in kind transfers, such as food stamps and low-interest loans for college education.

What is true about the market and public sectors?

Competitive behavior is present in both sectors.

Despite many differences, the market and public sectors are similar in what way?

It is costly to use scarce goods, whether through the private or the public sector.

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, while most of the costs will be imposed on voters from other districts.

Assume that you are a member of the U.S. House of Representatives from your home state and district. Why do 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 be received by your constituents, whereas most of the costs will be imposed on voters from other districts.

Do politicians always vote for laws that promote the general welfare? If not, why?

No, many politicians vote in the direction that will benefit them and their constituents, and many of times it is not their legal constituents but their investment partners

Economists use the term shortsightedness effect to describe what?

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

Rational ignorance effect

Recognizing their vote is unlikely to be decisive, most voters have little incentive to obtain information on issues and alternative candidates

User charge

The fee paid for the use of a public sector good or service

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?

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

If voters realize that their tax dollars are being used for special-interest projects, why aren't they able to stop the projects?

The politicians were voted into their offices and can allocate money however they want

Earmarking

The practice of appropriating money for specific pet projects of members of Congress, usually done at the order of lobbyists, added to bills at the last minute with little opportunity for deliberation

How does debt financing compound the shortsightedness effect?

The shortsightedness effect explains why politicians will find debt financing and unfunded promises attractive.

What characteristics are present when the political process creates productive actions?

Voters will pay in proportion for the benefits they receive, then productive projects will be passed and the unproductive ones will not

What is true of government activities under a system of representative democracy?

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

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

all voters will gain from it.

What is a predictable side effect of increased government activity (taxes, subsidies, etc.) designed to redistribute income among citizens?

an increase in rent-seeking activity

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

an increase in rent-seeking activity.

Special-interest issue

an interest that generates large personal benefits for a small number of constituents while imposing a small individual cost on a large number of others

The theory of public choice

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

Public-choice analysis

applies the tools of economics to the political process in order to provide insight on how the process works

Public choice analysis

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

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.

"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. This statement is

correct, 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.

Government decisions tend to be biased toward actions that have

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

Public choice analysis indicates that

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

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.

Which of the following factors weakens the case for private-sector provision of goods and services as opposed to public-sector provision?

externalities

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?

first-class mail delivery from the U.S. Post Office

What is the difference between government spending and a transfer payment?

government purchases directly absorb resources and are apart of the domestic output transfers payments do not directly absorb resources or create output

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 than a national one.

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 benefits.

Shortsightedness effect

issues that yield clearly defined benefits at the expense of future costs that are difficult to identify

The distinguishing characteristic of a government that makes it different from a 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.

Pork-barrel legislation

legislation that gives tangible benefits to constituents in several districts or states in the hope of winning their votes in return

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

logrolling

Legislators often gain by bundling a number of projects that benefit local districts at the expense of general taxpayers. This is called

pork-barrel legislation.

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.

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

shortsightedness effect.

Which of the following groups does the quotation suggest would have the most influence on public sector action?

special interest groups

Who is legally permitted to use coercive force to modify the actions of adults against their will?

the government

Legislation that offers immediate and easily recognized benefits, at the expense of uncertain costs that are in the distant future, is often chosen even when economic inefficiency results. This can be expected because of

the shortsightedness effect.

Market allocation and the political process differ in that

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

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 and known 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 the competitive forces between candidates in elections provide politicians with a strong incentive to offer voters a bundle of political goods that they believe

will increase their chances of winning elections.