CHAPTER 5
Government’s Role and Government Failure
A. Short-Answer, Essays, and Problems
1. Describe how the government differs from private firms and individuals participating in a market.
7. The “invisible hand” cannot fully work when government economic polies are in place. Explain.
8. (Consider This) “The size of government is too big.” Evaluate this statement.
9. (Consider This) Explain how economists determine whether a government program should be reduced or
eliminated.
10. What is meant by the term government failure as described in this chapter?
11. Describe five major sources of government failure.
16. Define “earmarks” and give an example.
17. Describe how rent-seeking behavior works.
18. Compare the special-interest effect with rent-seeking.
19. Give three different examples of rent-seeking behavior.
20. Discuss the problem of clear benefits and hidden costs related to government programs. Why can it result
21. What are unfunded liabilities? Give an example.
22. What are the two conflicting incentives that politicians must deal with? What is the result of this conflict?
23. Discuss the problems that can arise when a government experiences a chronic budget deficit.
24. How have states worked to overcome the temptation of increased government spending and decreased
taxation?
27. Discuss the political pressures associated with monetary policy. What has the United States done to try to
reduce these political pressures?
28. How do limited and bundled choice contribute to government inefficiency?
29. Why would private business be considered more efficient than public agencies?
30. (Consider This) A 2005 study found that government operated entities violated health and safety laws at
31. What is regulatory capture? Name an industry in which regulatory capture is present.
32. Examine regulatory capture in the railroad industry.
36. Discuss a situation in which a government loan guarantee may be socially beneficial.
37. How does corruption contribute to government failure?
38. Why are the public sector and private sectors “imperfect institutions”?
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B. Answers to Short-Answer, Essays, and Problems
1. Describe how the government differs from private firms and individuals participating in a market.
2. The government can improve economic efficiency by forcing individuals and firms to participate in the
market. Explain two situations when government intervention is beneficial.
3. Explain how government intervention can improve economic efficiency in a market with a negatively
externality.
4. Explain how government intervention can improve economic efficiency in public good market.
When a product is a public good the private market under produces and is inefficient. The government can
5. Discuss private-sector risks and the role government intervention has in improving economic efficiency.
Private-sector risks protected by the government include ensuring only mutually agreeable transactions take
place, outlawing price manipulation, and protecting property and human rights. The government ensures
only voluntary transactions take place in the economy by making blackmail, extortion, and other forms of
6. Name the problems government faces in directing and managing the economy.
Government faces various problems when directing and managing the nation. (1) Government economic
policies are not self-correcting. Government intervention has difficulty dealing with the allocation of
7. The “invisible hand” cannot fully work when government economic polies are in place. Explain.
8. (Consider This) “The size of government is too big.” Evaluate this statement.
9. (Consider This) Explain how economists determine whether a government program should be reduced or
eliminated.
10. What is meant by the term government failure as described in this chapter?
11. Describe five major sources of government failure.
One reason for this type of failure is a principal–agent problem with representative democracy whereby the
interests of the voters (principals) are not aligned with the interests of the elected representatives (agents),
12. Explain the principal–agent problem in business.
13. Explain the principal–agent problem for representative democracy.
14. (Consider This) Describe the collective action problem as it applies to mohair.
15. Explain the special-interest effect.
16. Define “earmarks” and give an example.
Earmarks are specifically designated authorizations of expenditures that enable senators and representatives
to provide benefits to in-state firms and organizations without subjecting the proposals to the usual
evaluation and competitive bidding. Some of the benefits of these projects outweigh the costs. Others are
questionable; thus reallocating scarce resources from higher-valued to lower-valued uses.
17. Describe how rent-seeking behavior works.
18. Compare the special-interest effect with rent-seeking.
19. Give three different examples of rent-seeking behavior.
20. Discuss the problem of clear benefits and hidden costs related to government programs. Why can it result
in inefficiency?
21. What are unfunded liabilities? Give an example.
22. What are the two conflicting incentives that politicians must deal with? What is the result of this conflict?
23. Discuss the problems that can arise when a government experiences a chronic budget deficit.
24. How have states worked to overcome the temptation of increased government spending and decreased
taxation?
25. Explain the two stabilization policies politicians use to smooth business cycles.
26. Discuss the political pressures associated with fiscal policy.
27. Discuss the political pressures associated with monetary policy. What has the United States done to try to
reduce these political pressures?
28. How do limited and bundled choice contribute to government inefficiency?
29. Why would private business be considered more efficient than public agencies?
30. (Consider This) A 2005 study found that government operated entities violated health and safety laws at
higher rates than private companies. Examine one explanation for this.
31. What is regulatory capture? Name an industry in which regulatory capture is present.
32. Examine regulatory capture in the railroad industry.
33. Evaluate the benefits and cons of deregulating a governed industry.
34. Discuss the history of government’s investments decisions.
The government has been known to secure funding for private businesses that are unable to obtain funding
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35. Explain the Solyndra Subsidy.
36. Discuss a situation in which a government loan guarantee may be socially beneficial.
37. How does corruption contribute to government failure?
38. Why are the public sector and private sectors “imperfect institutions”?
39. Discuss what is meant by the quote “The relevant comparison is not between perfect markets and imperfect
governments, nor between faulty markets and all-knowing, rational, benevolent governments, but between
40. (Last Word) Give three examples of “government failure” in the news.
The answer will depend on selections from the Last Word. Here are three possible choices (1)
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41. (Last Word) Using your knowledge gained from this chapter, briefly explain why government “pork” is
created, even when the government spending appears ridiculous.
Pork occurs, even though it appears ridiculous, because of government failure. This can be a result of
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C. Appendix Questions
42. How have firms and organizations devised ways to overcome information problems without government
intervention? Give three examples.
43. What are the basic differences between public choice theory and the economics of taxation?
44. Why may majority voting produce economically inefficient outcomes? Give a numerical example that
45. Why does the private market succeed in meeting consumers’ demands while majority voting in many cases
fails to do the same?
46. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
More police protection
1
2
3
More fire protection
3
1
2
More schools
2
3
1
(a) What will be the choice between more police protection and more fire protection?
(b) What will be the choice between more schools and more police protection?
(c) What will be the choice between more fire protection and more schools?
(d) What do the rankings in the table indicate about choices made under majority rule?
47. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
New park
1
2
3
New bridge
3
1
2
New school
2
3
1
(a) What will be the choice between a new park and a new bridge?
(b) What will be the choice between a new school and a new park?
(c) What will be the choice between a new bridge and a new school?
(d) What do the rankings in the table indicate about choices made under majority rule?
48. Explain two ways inefficiencies associated with majority voting may get resolved.
49. “Political logrolling solves the problem of inefficient outcomes in the provision of public goods.”
50. Explain the paradox of voting that is illustrated in the table below in choices between the same expenditure
on three different public goods. The numbers under each name indicate the voting preferences (first,
second, or third choice) of each of the three citizens in the society.
Public good
Hickory
Dickory
Dock
Hospital
1
2
3
Roads
3
1
2
Police
2
3
1
51. (Consider This) As long as politicians know what voters want, government will deliver allocative and
productive efficiency. Evaluate.
52.What is the median-voter model and what are two implications from it?
53. If the political system follows the median voter model, why will many people likely still be dissatisfied by
the extent of government involvement? What do some people do to remedy this?
54. Three people on a city council have three different spending proposals for snow removal. Mitchell wants
to spend $2 million to purchase more trucks and equipment. Williams wants to spend $1 million and
55. Suppose a town is considering either providing a tax break to suburban businesses in the city or to provide
public health care in an effort to promote growth in the city. Assume there are 5 people living in the city:
Jack, Richard, Marie, Susan, and Lewis. Their willingness to pay for the policies is summarized in the
table below.
Public Good
Jack
Richard
Marie
Susan
Vickie
Lewis
Tax breaks to suburban
businesses
$100
$650
$500
$50
$75
$100
Public health care
250
50
100
600
700
350
(a) Which policy would have the greatest gain for the town’s citizens?
(b) Suppose that Richard and Marie, the two businesspersons of the town, have been closely following this
debate and decide to lobby for the tax break, as they stand to make significant gains from the policy.
To further cement their effort, they make contributions to key city council persons’ campaign funds
and in the end, they are able to get the tax breaks passed. What effect does this have on the total
benefit for Richard and Marie? For the community as a whole?
(c) What type of government failure does this example illustrate?
56. What is meant by “voting with their feet?”
D. Answers to Appendix Questions
42. How have firms and organizations devised ways to overcome information problems without government
intervention? Give three examples.
43. What are the basic differences between public choice theory and the economics of taxation?
44. Why may majority voting produce economically inefficient outcomes? Give a numerical example that
45. Why does the private market succeed in meeting consumers’ demands while majority voting in many cases
fails to do the same?
46. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
More police protection
1
2
3
More fire protection
3
1
2
More schools
2
3
1
(a) What will be the choice between more police protection and more fire protection?
(b) What will be the choice between more schools and more police protection?
(c) What will be the choice between more fire protection and more schools?
(d) What do the rankings in the table indicate about choices made under majority rule?
(a) A majority of voters favors more fire protection.
47. Answer the next four questions on the basis of the following table which shows the rankings of the public
goods by three voters: A, B, and C.
Public good
Voter A
Voter B
Voter C
New park
1
2
3
New bridge
3
1
2
New school
2
3
1
(a) What will be the choice between a new park and a new bridge?
(b) What will be the choice between a new school and a new park?
(c) What will be the choice between a new bridge and a new school?
(d) What do the rankings in the table indicate about choices made under majority rule?
48. Explain two ways inefficiencies associated with majority voting may get resolved.
49. “Political logrolling solves the problem of inefficient outcomes in the provision of public goods.”
Evaluate.
50. Explain the paradox of voting that is illustrated in the table below in choices between the same expenditure
on three different public goods. The numbers under each name indicate the voting preferences (first,
second, or third choice) of each of the three citizens in the society.
Public good
Hickory
Dickory
Dock
Hospital
1
2
3
Roads
3
1
2
Police
2
3
1
The voting paradox is illustrated by the different voting decisions. In a choice between spending on a
hospital and spending on roads, the majority prefers to spend money on roads. In a choice between
spending money on roads or police, the majority prefers to spend money on police. Thus it would seem
that expenditures for police are the most preferred because that spending is preferred over roads, and, in
turn, spending on roads is preferred over hospital spending. However, in a choice between spending on
police or a hospital, the majority prefers spending on a hospital. Voter preferences are inconsistent in this
case.
51. (Consider This) As long as politicians know what voters want, government will deliver allocative and
productive efficiency. Evaluate.
52. What is the median-voter model and what are two implications from it?
53. If the political system follows the median voter model, why will many people likely still be dissatisfied by
the extent of government involvement? What do some people do to remedy this?
54. Three people on a city council have three different spending proposals for snow removal. Mitchell wants
to spend $2 million to purchase more trucks and equipment. Williams wants to spend $1 million and
purchase half the equipment. Symmes doesn’t want to purchase any new equipment, but prefers to spend
$200,000 for additional stocks of de-icing chemicals. What does the median-voter model suggest will
happen in this case? Explain the likely outcome.
55. Suppose a town is considering either providing a tax break to suburban businesses in the city or to provide
public health care in an effort to promote growth in the city. Assume there are 5 people living in the city:
Jack, Richard, Marie, Susan, and Lewis. Their willingness to pay for the policies is summarized in the
table below.
Public Good
Jack
Richard
Marie
Susan
Vickie
Lewis
Tax breaks to suburban
businesses
$100
$650
$500
$50
$75
$100
Public health care
250
50
100
600
700
350
(a) Which policy would have the greatest gain for the town’s citizens?
(b) Suppose that Richard and Marie, the two businesspersons of the town, have been closely following this
debate and decide to lobby for the tax break, as they stand to make significant gains from the policy.
To further cement their effort, they make contributions to key city council persons’ campaign funds
and in the end, they are able to get the tax breaks passed. What effect does this have on the total
benefit for Richard and Marie? For the community as a whole?
(c) What type of government failure does this example illustrate?
(a) The provision of public health care would have the greatest benefit for the town with a total benefit of
$2050, compared to a benefit of $1475 for the tax break.
56. What is meant by “voting with their feet?”