Chapter 5 Microeconomics (Candalla)

Weak government enforcement of contracts and laws tends to

discourage economic activity by encouraging private-sector coercion such as blackmail and extortion.

In corporations, owners are __________________ and managers are ________________.

principals; agents

In representative democracy, voters are ____________ and politicians are ______________.

principals; agents

As it relates to owners and managers, the principal-agent problem results from the

separation of corporate ownership and control.

Which of the following is a key difference between the economic activities of government and those of private firms?

Government has the legal right to force people to do things; private firms do not.

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.

Information problems create inefficient outcomes in

both the private and the public sectors.

How does government's power to coerce behavior tend to reduce private-sector risk?

by enforcing contracts and discouraging illegal behavior that threatens private property

The government's ability to coerce can enhance economic efficiency by

correcting market failures.

Which of the following is an activity of government that is not an activity of private firms?

enforcing involuntary transactions

Factors that impede the attainment of economic efficiency in the public sector are called

government failures.

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.

"Vote for my special local project and I will vote for yours." This political technique

is called "logrolling."

The many layers of the federal government in the United States

lead to economic inefficiencies because of difficulty aggregating and conveying information.

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

reduce private-sector risk and increase economic efficiency.

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

Individual accountability within the government bureaucracy

tends to be lacking because of civil service protections and the complexity of government.

Which of the following is a source of government failure?

the enormous size and scope of government

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).